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Utilising Revolving Credit To Reduce Your Mortgage Faster

By John Bolton

Revolving Credits are one of those gems that financial advisers like pull out to look clever. They are not for everyone, but in my mind Revolving Credit is awesome! They are flexible and (done the correct way) can help you pay your mortgage off faster. You can easily drop the duration of your mortgage by 5-10 years and (if you have a mortgage over $300,000) save up to $80,000 in interest.

This isn’t the only strategy to decrease your mortgage but they work well.

How does Revolving Credit work?

With a revolving credit you can place some of your mortgage into your transaction account. It will seem like living with a big overdraft but at mortgage interest rates. Any spare money in your transaction account effectively lowers the mortgage balance and therefore you pay a lesser amount in interest.

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The main reason many home owners tend to disregard revolving credit is that is can sound overly complicated to the uninitiated. After all, if you handle your mortgage and daily living transactions all from a single account, what’s to prevent it from becoming one giant monetary mess? How can you be sure if you’re getting ahead? And how do you stop yourself against dipping too far into your mortgage money when it seems like it’s right there to use?

Hint: Work with multiple transaction accounts!

The easiest and most utilised option for property owners working successfully with a revolving credit plan is to set up two transaction accounts. This option has become even more popular given that a large number of banks now offer inexpensive or even free electronic transaction accounts.

We recommend having your income/earnings paid into the Revolving Credit. Your regular charges and the mortgage will be paid from the Revolving Credit. But, for day-to-day expenses set up a monthly automatic transfer to a second transaction account and use that one.

Budget is crucial for anyone with property debt, and the best budget to utilise for any home owner is based on the idea that your costs should never be more than your income. Of course unforeseen expenses are bound to crop up – particularly if you are taking care of a family – so if you do think you need some more cash you can access this from your revolving credit in special circumstance. Making the conscious decision to transfer money out of your revolving credit and into your daily transactions account is far safer than just using one big account, so make this tactic the first thing you put into practice in your revolving credit strategy.

An alternative is to use your Credit Card as the day-to-day account and pay it off in full from the Revolving Credit every month. You reap the rewards of the 55 days interest-free and any incentive points, if you’re interested in that.

How large should I set my Revolving Credit?

When we establish these we initially work out how much of your mortgage you can conceivably pay off in 1-2 years. That form the foundation of how big we make the Revolving Credit.

With the rest of the mortgage we tend to set it to a 25 year term and focus any added repayment onto the revolving portion. When your fixed rate matures we can then reduce the fixed rate mortgage by moving some of it across to the revolving credit, and begin again!

As well as being able to become mortgage free faster than you might have ever expected, one of the other significant advantages of the revolving credit strategy is versatility. This strategy of mortgage management not only lets you to become free-hold faster, but is flexible enough to continue to meet your needs if and when your circumstances change. Planning for children? Do you need to cut back to one income instead of two? Revolving credit can also allow you to slow down your repayments if you ever need to, making it a fantastic tool to future-proof your financial stability.

About the Author: John Bolton is one of New Zealand’s leading experts on property finance, particularly mortgages and interest rate risk management. His business,

Squirrel Mortgages

, helps New Zealanders buy over $10m of property every month.

Source:

isnare.com

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