Avalon’s Money Thread: Revolving Credit Mortgages.
These are sometimes called Line Of Credit (LOC) mortgages, and are very common here. They are most like the One Account in the UK, in that it’s a mortgage and current account rolled into one. Basically it’s a current account with a whopping great overdraft. The benefit is that if you get paid your salary directly into it, it can reduce the amount of interest you pay on the loan.
However there are some serious downsides especially if you are not too good at looking after your money. They are notorious for not getting paid off, as it’s all too easy to keep dipping into for buying cars, boats, shoes or coffee.
Also, because they are usually a few % more than fixed rate mortgages – you need to have a certain amount in there at all times to offset the higher interest rate. There’s actually a calculation you can do to work out how much of a balance you need to keep in.
I would say if you are thinking of a revolving credit account you do need to be very good with organizing your money, as it’s all too easy to end up with the OD limit never going down. So you never pay off that part of the mortgage. Some banks have these types of accounts where they do drop the limit each month so if you wanted one, but feel concerned look for that. Otherwise the way I deal with is:
I use Quicken to run my accounts at home. Doesn’t really matter how you do it but have some way of keeping track of your mortgage (don’t rely on the bank to tell you). In Quicken I have set up a “savings goal” and each month I move money into it. This is always the amount of money I “should” have paid on the mortgage if it was a normal one, minus the interest for that month. So for example: I should pay a total on $902 a month for a $100k mortgage at 9.05%. My interest for the month is around $300, so I pay $602 into the savings pot. When I have $5000 in there, I “move it back out” and ask the bank to reduce the overdraft limit by $5000. I have then paid off 5k. I know this may sound weird because the savings pot only exists in Quicken or on a spreadsheet, but it works.
You also really need a credit card. By putting as much on the credit card as possible, you keep the balance in the revolving credit account as high as possible for as long as possible. But always make sure you know exactly how much you can spend on the credit card without getting into trouble. For this to work well, and not get into debt you need to be able to pay off the CC each month in full. If you don’t think you can do that then it may not be a good idea to have this kind of mortgage. Do not use the CC for buying consumer items that you do not have the money for. That way lays ever-increasing mortgage debt. Maybe just have a very small limit on the credit card. You need the equivalent of 2 months spending as a minimum limit.
Avalon’s Money Thread is a series of posts which were originally written in 2007 for an Immigration Forum. They came about by answering questions that forum members asked, about how to cope with the often difficult financial situation they face in New Zealand. They formed the basis of what was eventually to become the book Avalon’s Guide: after another year or so of drinking way too much coffee and finding out way more about taxes, money and investing that any sane person should.
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Related posts:
- Avalon’s Money Thread: Banks and Bank Charges.
- Avalon’s Money Thread: Can I get a decent affordable mortgage?
- Avalon’s Money Thread: Am I a Big Spender?
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