This article first appeared on Stuff.co.nz on 6 June 2014
It sounds too good to be true, but a type of big overdraft could save you tens of thousands of dollars on your mortgage costs.
In banking terms this is known as a revolving home loan - it's what happens when you use one main account for both your mortgage and your everyday transactions.
Yes, it is an overdraft, but because it is secured by your property you pay a mortgage interest rate on it rather than an unsecured rate which applies to overdrafts.
The benefit of a revolving home loan facility is that it can save on interest costs by keeping the daily balance of your loan as low as possible. This is done by direct crediting your income into the account and using it to pay your everyday expenses.
Interest is calculated daily on the outstanding loan balance, so keeping it as low as possible means you will pay less interest. Also, a revolving home loan might suit if the interest you earn on savings or other deposits after tax is less than the interest you pay on your home loan.
"Over time it can make a big difference," says ASB general manager, product and strategy, Shaun Drylie.
The big thing with revolving credit mortgages is the need for discipline, so they are definitely not for everybody.
"A revolving home loan has a set credit limit, just like a credit card. As you repay your loan or make lump sum repayments you can borrow back up to your limit at any time, so self-control is needed to ensure you've paid off your loan by the time you expect," Drylie says.
The bank can help here too. They can usually provide other tools to assist with budgeting so you can keep on track with your financial goals. For example, ASB has a mobile phone app so you can monitor your spending whilst on the move.
Some revolving home loans come with a reducing limit option where the credit limit reduces as the loan balance reduces, so the temptation to redraw is avoided.
The set limit option can work well for property investors (who are often buying and selling properties and don't want to have to go back to the bank each time) or people with changeable incomes or who earn commissions and/or large bonuses, as they can pay the debt down and then draw it down again as necessary.
"Often, the more uneven the income, the more likely a revolving home loan is going to be suitable," Drylie says.
Many people prefer the flexibility of the set limit option on a revolving home loan, simply for the convenience. These types of home loans have a floating (variable) interest rate.
Some people will mix and match by having some of their loan on a revolving home loan and some on a fixed interest rate, providing the best of both worlds.
"Revolving home loans can mean you pay less interest on your home loan overall and provide a great deal of flexibility and convenience. But with it comes a need for self-control and financial discipline," Drylie says.
- Revolving home loans require discipline.
- They can help you pay less interest on your home loan overall.
- They are ideal if you have a lumpy income or require flexibility in how your pay your home loan.
- They are on a floating rate, which may be low at the moment, but is subject to change at any time.
- Revolving home loans are not for everyone. Talk to your bank or home loan provider for advice.
Click here to find out more about getting a home loan with ASB.