Revolving credit mortgages: what are they & how do they work?

With a revolving credit, part of your mortgage will behave similarly to a big overdraft. You can deposit into the account without incurring fees, but you can also spend what you’ve already deposited. 

For example, let’s say you’ve made a $20,000 portion of your mortgage a revolving credit:

• If you deposited $15,000 into your revolving credit you’d only pay interest on $5,000. 

• You’d still be free to spend that $15,000 if you wanted to. 

In other words, you won’t pay any interest on the money you’ve paid back - you’ll only pay interest on the amount outstanding.

Normally, when you make a mortgage repayment that money is gone (unless you refinance). But with a revolving credit, any money you deposit into your revolving credit can be taken out as soon as you need it.

So for example, if you put a chunk of cash into your revolving credit then a month later your phone broke you could withdraw it to buy a new one. You may have withdrawn the cash, but you still got the benefit of that money sitting in your revolving credit for a month reducing the amount of interest you pay. 

A bank overdraft is similar to a revolving credit in some ways, but they typically come with a much higher interest rate. While you’ll pay a regular variable home loan rate (7-9%) on your revolving credit you could pay as much as 20% on a bank overdraft. 

Revolving credits are often used to fund renovations. This is because, as the renovation progresses, you’ll be able to withdraw cash as you need it - when expenses crop up. You’ll only pay interest on the money you’ve spent. 

If you were to get a normal loan, on the other hand, you’d pay interest on the total amount from day one, regardless of when you spent it. 

Chances are, the revolving credit portion of your mortgage will be more expensive than the rest. That’s because the rest of your mortgage will most likely be on a fixed interest rate, while your revolving credit will be on a variable rate. Variable rates are typically 0.5% to 2.5% higher than fixed rates. There may also be extra fees associated with a revolving credit. 

If you spend most of the extra money you put into your revolving credit, having one may cost you money - rather than save you money. So, before you decide to get a revolving credit, it’s important to consider how disciplined you are with money and how much you’re typically able to save. After all, there may be no point having one if you don’t use it to make extra repayments. 

Generally, revolving credits work best to reduce interest charges and mortgage terms when they’re used as tools to enable savings goals. 

• For example, your goal could be to put aside $1,000 each month. You could, instead, put this money into your revolving credit account. 

• If you took out a $12,000 revolving credit you could pay the entire thing off within one year, cancel that revolving credit to reduce your loan balance - then rinse and repeat. 

If you had a $400,000 loan with an 8% interest rate and a 30 year loan term and you followed the above example, you could pay your loan off more than 14 years sooner and pay around $380,000 less interest.