HOMELOANS
BY
Revolving Credit Mortgages
This mortgage type is given a variety of names by different lenders including, Flexi, FlexiPlus, Orbit, Mortgage Plus and others. A revolving credit mortgage is approved with a limit, being the maximum amount that you can borrow at any time. Each month you must pay the interest that has accrued on the balance during the previous month. It operates in a similar fashion to an overdraft.
You
can redraw or repay whatever and whenever you want up to the mortgage
limit. Often a borrower's
earnings can also be paid directly into the mortgage so that mortgage
interest savings can be obtained.
EXAMPLE:
A
revolving credit mortgage with a limit of $120,000 and an interest rate of
6% would have an interest cost of $600 per month if fully drawn for the
whole month. The total
interest cost over the term is more difficult to quantify as it will
depend on how much "revolving" goes on!
At worst, if the $120,000 remains fully drawn over a 25 year term
the total interest cost would be $180,000, plus you would still owe the
mortgage amount.
BENEFITS:
•
Allows
consolidation of all borrowings (Mortgage, loans, HPs, credit card) into
one single loan account.
•
Interest rate
charged is usually the prime housing rate thereby the higher rates
associated with credit cards and personal loans are avoided.
•
Interest is
only charged on the daily balance owing and not the facility limit.
•
Funds are on
call and borrower has instant access (by cheque, telephone banking) for
any future borrowing need.
•
Enables
efficient use of surplus cash or savings which can be applied to reduce
loan balance until required later on.
•
Generally a set
monthly charge covers all transaction fees and charges.
•
Funds can be
used for any purpose.
•
Salary and
other income can be deposited into mortgage to reduce debt balance and
therefore interest payable.
DISADVANTAGES:
•
Interest rate
payable is the floating rate and not eligible for fixed rates.
•
Interest rate
may be a small margin over the prime residential rate.
•
No structured
program of principal repayment. Can be left owing the original loan amount
many years later.
•
Requires sound
personal/financial discipline to resist extravagant or impulsive
purchases.
•
Total interest
cost over the long term can exceed other loan types.
•
Can be subject
to review and facility withdrawn if borrower's circumstances adversely
altered.