Hi, everyone. It's Blandon here from iRefi Mortgages. Today I want to share with you
two power plays that you can have with the revolving credit facility.
So, first of all, what is it? Revolving credit facility is another
structure that you can have for your mortgage. In a normal mortgage facility
where you have principal and interest, you pay over time, usually 25 to 30 years.
And you pay majority principal at the start and slowly you pay off the interest.
And if you want to pay it off faster, you simply increase the repayment amount
for normal facility. Now, the problem that you're going to face is that
once you increase your repayment amount towards the mortgage that you have,
it's a little bit harder to just ask the bank, "Hey, I'm needing my cash flow,
can I drop my repayments?" So, that's the problem that you might run
into by committing to a high repayment. So, having a revolving credit facility
gives you that flexibility to actually pay the extra when you have it and also
take it back when you need it, like such as an emergency.
So, how it works is, I've got a couple of illustrations here.
It's kind of like an overdraft facility account. So, you might put a small portion
of your mortgage, say $50,000 on a revolving credit facility.
And, what this is, is like a floating mortgage. And what happens is,
let's say, you've got $10,000 of bonus coming in the next month.
Right? So, you got plus $10,000. And what's going to happen is you will put
that $10,000 into your mortgage account. And it will sit in there
like an overdraft account. So, instead of paying interest on the full $50,000,
say, for example, 5%. Instead of paying interest on the $50,000,
you pay interest on the difference. Which is how much?
Fifty-thousand minus $10,000, you pay interest on $40,000 instead.
So, when your pay comes in, you can put it straight into your
revolving credit account. Again, you will pay interest on the
difference only. So, that's the advantage of having a revolving
credit facility. Now also, if you have an emergency, you're like,
"Okay, it's time to do renovations." You can actually draw this money
back out at the floating rate. So, there are two downside with the revolving
credit compared to a fixed loan. You are on a floating rate,
so slightly higher, usually about 1%. And there's an account fee of about $10
per month. Okay. So, this is how a revolving credit works.
Now, the second kind of revolving credit…Actually,
before we go to the next one, there's a lot of different names
for revolving credit. So, at different banks like ASB, they actually call it
the Orbit Home Loan. At BNZ, they call it the Rapid Repay. Westpac it's called
Choice Everyday. And you've got ANZ calling the Flexi Account.
So, it does get a little bit confusing, but this is the basics of it.
Now, there's also a second type of revolving credit, but it's actually
called an Offset Account at the different banks. So, BNZ actually call this
the TotalMoney. And Westpac just calls it the Offset Facility. So, how this
one works, is you might have the same minus $50,000 mortgage,
and instead of having just one account for the overdraft, you might want to have
different accounts. You might want to have your day-to-day, you might want to have
your holiday account, and you want to save up in there. And you might
want to have, you know, your kid's account, you might have $1,000 in there,
and so forth. And then you might have your…I don't know, maybe trust…Some sort
of account that you put away to build up a business. And then so forth.
So, altogether what happens is if you add all your savings account together,
you might have $12,000. And some people like to have
them separate. So, it's easier to manage. And what the Offset Facility will do is,
it'll look at all of the savings that you have in your other accounts and it'll
put it against your mortgage. So, for example, $12,000 here, they take
off $12,000, so you're left with $38,000. And you pay the interest on the
difference only. So, this is a very, very good facility as well.
And a lot of people actually prefer to serve, if you're an investor,
or you've got a big family with lots of different accounts, or you feel
like you need to separate all your money to actually manage it properly,
this is a very good facility. So, two power plays on how you can sort of utilize
this revolving credit facility. The first one that we see people doing is
actually replacing the savings account. So, as you can see, the more money you can
put on your revolving credit, the more money you're going to save.
So, a lot of people might completely replace their savings account because in a
savings account they might get around 2.5% return on, you know, the $30,000, $50,000
that they put in their account. But straight away, by putting this same
amount into the mortgage, you're at least saving the fixed portion,
which is at the moment, around 4.5%. So, let me ask you, you know,
if you have savings, would you rather get 2.5% return or would you
rather have 4.5% savings on your mortgage? So, straight away,
replacing savings is a huge one. The second way you can sort of exploit the
revolving credit facility is investment opportunities. So, there's a lot
of different things you can do. So, if you have money just sitting there
as like an overdraft account. I mean, normally if you're trying to buy
something like a car, you know, you might go to a finance company.
But if you got a really good opportunity that comes up and you can just buy
it with the money that's sitting in your account, you're going to get it for a
lot cheaper. But now if you think about it, like business opportunity,
like a machinery, or like a small business that come up for sale, it's very,
very cheap. You've already got the money sitting there ready to go and just buy it
straight away or even shares. Another way of using this is perhaps
property trading. If you've got a big facility, like one of my clients,
we just settled $892,000 revolving credit for him. He's able to…what he's trying
to use that for is actually put it in a managed fund. So, he's a overseas client
and he basically is just waiting for the opportunity for the foreign exchange
for the New Zealand dollar to become a little bit stronger before he transfer
that money over for other investment opportunities.
Otherwise, if you're a property trader, even if you're trying to buy
an investment property, you can use the revolving credit
as a deposit. So, that's one of the other ways you can explore it or use the power
of the revolving credit. I hope you enjoyed this video.
If you're needing more case studies, we've got two case studies down below.
And you can also join the Facebook group, iRefi Nation, for more updates
and also new contents. Talk to you guys soon.