The Power of Revolving Credit: Unleashing its Benefits

The Power of Revolving Credit: Unleashing its Benefits

Revolving credit is a financial tool that offers flexibility and convenience, allowing individuals and businesses to borrow money up to a predetermined limit and repay it over time. It enables borrowers to access funds whenever they need them, making it an ideal option for managing expenses and handling unexpected emergencies.

Unlocking the benefits of revolving credit

Unlocking the benefits of revolving credit can be a game-changer when it comes to paying off your mortgage more quickly. Revolving credit is a type of mortgage that acts like an overdraft, allowing you to borrow against your home loan. It offers flexibility and can be used strategically to save on interest and pay down debt faster.

So, how does revolving credit work? Let's break it down. Imagine you have a $500K mortgage, and you decide to set up a revolving credit with a portion of that amount, let's say $10K. Unlike other loans or overdrafts with high-interest rates, revolving credit is tied to your home loan rate, which is typically lower, around 4% or 5%. You only pay interest on the outstanding balance of your revolving credit, not the amount you have already paid back. For example, if you have $4K in your $10K revolving credit account, you only pay interest on the remaining $6K.

There are two types of revolving credit: reducing and non-reducing. A reducing revolving credit functions like a Principal and Interest loan, where you are gradually required to pay it off over time, usually 30 years. On the other hand, a non-reducing revolving credit is similar to an interest-only loan, where the size of the credit limit remains the same. However, it's important to exercise discipline with a non-reducing revolving credit to avoid having it indefinitely.

Using revolving credit as part of your mortgage strategy can help you pay off your mortgage faster. The Mortgage Buster strategy involves making extra payments into your revolving credit alongside your regular mortgage repayments. As you reduce the balance of your revolving credit, you decrease the amount of interest you pay. Once you have paid off the revolving credit, you can use that money as a lump-sum payment towards your mortgage. This strategy can significantly shorten the time it takes to pay off your mortgage.

There are pros and cons to using revolving credit. On the positive side, revolving credit offers flexibility. It functions like a transactional account, allowing you to deposit and withdraw money as needed. Many borrowers choose to deposit their income into their revolving credit account and pay their expenses from there. This temporarily reduces the amount of interest they pay. Additionally, revolving credit can provide a safety net in case of emergencies, as you can access the funds easily. However, revolving credit generally comes with a higher interest rate compared to traditional mortgages. It's important to strike a balance and use it wisely to avoid paying more in interest.

To set up a revolving credit, it's recommended to consult with a mortgage adviser or go directly to your bank. Determine how much extra money you can realistically put towards your mortgage within a year and set your revolving credit limit accordingly. For example, if you can save an extra $300 per week, you could set up a revolving credit for $15K. Deposit your income into the account and gradually pay off the balance. At the end of the year, you can transfer the entire amount back into your main mortgage, accelerating your debt reduction.

Revolving credit can also be used creatively in other ways. For example, it can help you gather the deposit for a new build investment property. By setting up a revolving credit for the 20% deposit required, you can access the funds immediately while still securing the remaining 10% needed at settlement. It can also be useful for funding renovations or managing cash sitting in your bank account.