The second strategy is very similar to the first strategy, except you don't make payments. So, the next one is revolving credit, which is probably the most common products or strategy that people hear about.

The easiest way to think about a revolving credit, it's just a credit card or an overdraft. It's on housing interest rates, but it operates exactly the same way. So, just think of it like a credit card. That's exactly the same. So, obviously don't spend it like a credit card.

I'll give you the positives and the negatives in a minute. It is slightly different. I just want to make sure I'm being disclosure wise, but that's the easiest way to think about it.

Jason: So, someone who has equity in their home, right? Is this what you mean by this?

Matthew: It's just a different type of home loan, if that makes sense.

So, you can take this as an alternative to a normal fixed rate home loan for a portion. So, it's kind of similar to the strategy one, but it's slightly different.

So, let's just say you had a $50,000 limit. Again, just think of it as a credit card if you want, but it's a limit, and you owe $50,000. What you could do is if you had, again, if you have spare cash, this is another downside of this. But if you had spare cash, you could put your $50,000 cash into this facility, and that would mean you've got a $50,000 limit, but you owe nothing. Therefore, you pay no interest.

On this one, you're going to pay interest on the $50,000, so you’ve saved no interest. So, you're saving whatever the current fixed interest rates are or whatever the fixed or floating, and you're saving that equivalent in interest.

Jason: It's a cash flow positive revolving credit, basically, is what you would ideally want.

Matthew: Yeah, exactly. All it is, is a bank account with a $50,000 limit. It's at housing interest rates. Again, it's at floating interest rates.

Jason: Still floating?

Matthew: Still floating, yeah, and that's the trap, right? So, we're going to cover off the positives and negatives.

Firstly, we'll cover off the positives. Obviously, if you owe nothing, you pay nothing. Today, by the way, is not financial advice for anybody that's watching. We're just talking generally here. So, owe nothing, pay nothing, okay? That's the advantage. Just like a credit card. If you owe nothing, you don't pay any interest. It's exactly the same. It's totally flexible. There are no regular repayments. That's probably the biggest difference between the first and this one.

Jason: Yeah, and so with that, it takes discipline, right?

Matthew: Exactly.

You have to keep under the limit, just like on a credit card, right? You need to make sure you’re keeping your balance underneath the limit. Otherwise, you're going to default. So, you have to stay under the limit. So, the way the facility works is just like a credit card, the interest is charged to the facility every month or every fortnight with whatever you owe.

So, the negatives are quite strong, just like in the other one. So, you need to be aware of this. The negatives are floating interest rates. So, any amount of money that you owe on the facility, you're going to pay a higher rate than if you just fixed. So, if you owe $10,000 in this example on that $50,000 facility, you're going to be paying higher floating interest rates than if you just fixed the $10,000 home loan.

Statistics show that 92% of people owe the limit after 10 years. Because you're not making any forced repayments, right? You could have this as a portion of your home loan. Like very rare for you to have a revolving credit for the entire home loan. It would just be a portion. So, $50,000 for example, separate portion to your normal home loan, yeah. But statistics show the majority of people owe the limit, right? Which is obviously a bad thing, which Jason, you hit the nail on the head about, what did you say?

Jason: It takes discipline.

Matthew: Yeah. No forced repayments, which could be a positive. You're like, cool. No payment. That's awesome.

Jason: Yeah. Like you can sort of take a break for a month or so, but then you really should stay on top of it as much as you can, right?

Matthew: But that can be a negative, like you said, because you're not paying it off. So that's a positive and a negative.

Jason: That's right.

Matthew: Again, you really need cash because if you don't have any available cash, you're not going to get any benefit out of this type of product because you're paying floating rates and there's potentially no forced repayments.

This works really well. Again, it relates to point number one. If you're going to be holding cash for a protracted period of time, then the benefits start compounding and it's really worth it.

Sometimes I have client consultations, and the client will say, “Hey Matt, we've got this $30,000 family emergency fund. We don't touch it. It's for family emergencies, a car repair, or we try and keep it away if we need to change jobs or whatever it might be. It's money that we keep long-term. We always have it. We don't use it. We've got no plans to use it.”

Hey, grab that, chuck that into a revolving credit. You don't want to pay interest on it. But it's always available because to transfer money out of this, it's just from one bank account to another. It's just a bank transfer instantly online. You don't have to go to an application or go into a branch or anything like that.

Pretty much most banks offer this. So, that’s a positive, most banks or lenders offer. It's quite more freely available. It's also the more common one that people are aware of.

The final point I'd make on this is, yeah, apart from the statistic that most people owe the limit, so you've got to be really careful, is there's common threads to some mortgage brokers who specialise in paying off your loan faster. What they do is that they tie this in with an Airpoints credit card.

So, what they do is that if your salary goes into this facility, you're not going to be paying interest on that portion and then spend all your money with an Airpoints credit card. You collect points, but you're not paying interest on the credit card, but you're receiving the interest savings on the revolving credit. At the end of the month, use your facility here to pay off your Airpoints credit card. But again, that's not financial advice.

Jason: Discipline.

Matthew: Yeah, it's a trap.

Jason: Discipline, because if you can't pay off that credit card, you can get yourself into some debt troubles there, right? And the goal is to get out of debt.

Matthew: Yeah, exactly.

It doesn't always work, because like I said, if you owe $1 on this facility, you're going to be paying floating rates, not fixed. I reckon when the balance is very low, for a protracted period where you have cash for a long, that's where you start to get more benefit out of it. But you've got to have the cash in the first place. If you've got no extra cash, this is not necessarily going to be your friend. I'm just kind of giving the positives and negatives. Probably 30% of applications we deal with have some sort of revolving credit involved with them, but we manage them carefully and we explain the risks.

Because once a client hears those negatives, they're kind of like, actually, that's not for us. You're like, for example, if a client got $30,000. But Matt, we're about to spend it on a kitchen in three months’ time. Well, you're only going to be saving that. And then as soon as you draw it out, you're going to be on floating. So, that's going to be limited benefit, unless we convert that into a fixed loan. So, you could convert that back into a fixed loan if you wanted to, quite easily.

Jason: So, one question that I have for you is we're subject right now to sometimes increasing, sometimes decreasing interest rates. Obviously to me, my gut is telling me it's more beneficial to us if the interest rates continue to drop as they have over the past couple of months here. But then again, it looks like I just fixed it slightly lesser than what was offered last month here. So, that would help us if the floating rate drops, right?

Matthew: Absolutely. So, strategy number three might be the most relevant for you. And this is the one I like the most.

Matthew Dawe

Mortgage Broker | Financial Adviser

Phone: 027 321 4287

Email: mortgages@matthewdawe.com

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