Home loans can be confusing. Between mortgage rates, loan terms and repayment plans, there’s a lot to get your head around. If you own your home, you’re probably familiar with a fixed mortgage – over 80% of mortgages in New Zealand are fixed. But what’s the deal with floating mortgages and revolving credit?
Revolving and floating – the same, but different
Revolving credit and a floating home loan have a lot in common. With either, you’ll pay a floating interest rate, but each option involves a different way to manage your mortgage. Floating rates generally reflect the state of the economy at the time, so they’ll go up and down.
Why get a floating rate home loan or revolving credit?
Fixed rates are traditionally much lower, so you may be wondering why you’d bother with floating. It gives you more wriggle room – you can pay off your mortgage faster without penalty fees (which can save you thousands). The more money you pay into your revolving credit or floating account, the less interest you pay on your mortgage. That means more of your monthly repayments will go towards paying off your mortgage, rather than just covering the interest. With both options, you could also benefit from any interest rate drops. That’s why many people put most of their mortgage into a fixed home loan and a smaller chunk into a home loan with a floating rate.
The next question? Whether your floating rate home loan should be in a revolving credit facility or not.
Revolving credit – pro and con
Pro: get money when you need it
Revolving credit is like a giant overdraft. It usually has a debit or EFTPOS card attached to it, so money can easily be added or taken out without penalty. That means all of your extra money can help offset your mortgage, but it’s not tied up – if an unexpected cost pops up, the cash is still there when you need it.
Con: it only works for good budgeters
Revolving credit can be a wonderful tool – if you’re disciplined. If you think you’d be tempted to spend up large instead of saving, a revolving credit could end up costing you more than you planned.
Floating rate home loan – pro and con
Pro: no need for financial discipline
With a floating home loan, you can pay lump sums off your mortgage without being penalised – and you can’t get that money out again. That removes the temptation to spend when you shouldn’t.
Con: you may not pay off your loan as fast
Once you’ve paid a chunk of money into your floating home loan, it can’t be accessed, so you’ll also need a rainy-day fund. That means you won’t be able to put all of your extra money against your mortgage – and you’ll miss out on the benefit of offsetting even more interest.
To float or to revolve?
If you’re looking to reduce your monthly interest repayments, revolving credit or a floating home loan can each do the trick. Which one will suit you best depends on your approach to finances – if you know you can be smart and sensible, the revolving credit option will be right for you. Bit of a spender? You might be better off with the floating rate home loan.
Either way, it’s best to talk to an expert about it first. Contact us today to discuss your options.
**These are general guidelines and are by no means a reflection of bank or lending policies