Revolving credit loans have had a pretty bad reputation.  It is a product that is sold on the promise of you being able to repay your mortgage in only a few years.  You do this by crediting your income in to your mortgage.  Living expenses are paid by your credit card which provides an interest free term – generally around 55 days.  Meanwhile those funds normally allocated for living expenses are sitting in your mortgage account thus lowering the balance and therefore also lowering the interest charges on your loan.  Prior to the Credit card accruing interest on your purchases you transfer funds from the revolving credit to the credit card meaning no interest is paid on the purchases.  

Research has shown that only about 15% of the population is able to use it effectively use this product for their personal mortgages.  This is generally because of the extreme discipline that is required in operating this type of facility.  It requires a long term adherence to a relatively strict budget to work effectively.  

However there are many ways in which a facility of this type can be of use particularly for property investors

1. It can be used for tenants to deposit their rental income directly in to.  It will reduce the balance of the loan and thus lower the overall interest charges on the loan.  
2. you can deposit extra funds in to this account.  You could do this on a regular basis eg weekly or monthly or you could do this in a lump sum.  This is particularly helpful for those with income from overseas who want to send funds back to NZ in fewer bulk sums.  
3. you could have a higher limit than the balance that is required.  You are only charged interest on the balance so a higher limit should incur no extra cost.  So in the event you lose a tenant or some urgent work is required on the rental property you have immediate access to funds.
4. A revolving credit facility could allow you to park some funds for a better return.  If you have funds to invest the interest rate on investment is low at this time – say around 4.5%.  Then you have to pay tax on this giving you a net return or say 3.02%.  However if you have borrowings and a revolving credit facility the interest being charged on your lending would be higher say as of today - 6.75%.  You could park the funds in the revolving credit meaning for that portion of lending you would be charged NO interest which gives you a net return of 6.75%.   However if you are a property investor and this revolving credit facility related to your investment property there could be tax implications when you pull out those funds for any other purpose other than for your rental property.  We would suggest getting advice from your Accountant in this instance.  

The effectiveness of property investors operating a revolving credit facility is higher than those operating it for personal use  not because Property Investors are more disciplined with their finances but usually it’s because they keep their investment accounts separate from their personal accounts.  

Be wary of agencies who only offer this type of facility as they often entice you to change lenders at cost and inconvenience.  This product is available through all major trading banks and most non-bank lenders.  

This post was written by

Trish Marsden - who has written 5 posts