Buying guide

Revolving credit mortgages: what are they & how do they work?

Everything you need to know about this useful but potentially expensive home loan feature

Last updated: 2 April 2024

A revolving credit can be a powerful tool to give you extra flexibility and help you pay off your mortgage faster. But at first they can be a little confusing. 

To clarify the concept we’ve taken a closer look at revolving credit mortgages, explained how they can be used and gone through their benefits and risks. 

What is a revolving credit mortgage?

With a revolving credit, part of your mortgage will behave similarly to a big overdraft. You can deposit into the account without incurring fees, but you can also spend what you’ve already deposited. 

For example, let’s say you’ve made a $20,000 portion of your mortgage a revolving credit:

  • If you deposited $15,000 into your revolving credit you’d only pay interest on $5,000. 

  • You’d still be free to spend that $15,000 if you wanted to. 

In other words, you won’t pay any interest on the money you’ve paid back - you’ll only pay interest on the amount outstanding.

The benefits of a revolving credits

May help you pay your mortgage off faster

The biggest benefit of a revolving credit is that it may give you the ability to pay your mortgage off faster. While normal home loans limit the amount of extra repayments you can make and may include fees for extra repayments, revolving credits don’t. 

With a revolving credit you can make extra repayments whenever you have the money. This both reduces your principal and the amount of interest you’re charged. If you’re consistent and don’t withdraw the extra repayments eventually you’ll pay your loan off sooner than you would have otherwise. 

Extra flexibility

Normally, when you make a mortgage repayment that money is gone (unless you refinance). But with a revolving credit, any money you deposit into your revolving credit can be taken out as soon as you need it.

So for example, if you put a chunk of cash into your revolving credit then a month later your phone broke you could withdraw it to buy a new one. You may have withdrawn the cash, but you still got the benefit of that money sitting in your revolving credit for a month reducing the amount of interest you pay. 

Revolving credits can be great but they can be expensive if they're not managed well.

Lower interest rate than a bank overdraft

A bank overdraft is similar to a revolving credit in some ways, but they typically come with a much higher interest rate. While you’ll pay a regular variable home loan rate (7-9%) on your revolving credit you could pay as much as 20% on a bank overdraft. 

Only pay interest on money you’ve used

Revolving credits are often used to fund renovations. This is because, as the renovation progresses, you’ll be able to withdraw cash as you need it - when expenses crop up. You’ll only pay interest on the money you’ve spent. 

If you were to get a normal loan, on the other hand, you’d pay interest on the total amount from day one, regardless of when you spent it. 

The drawbacks of revolving credits

You need to be disciplined

Revolving credit mortgages can be dangerous if you’re not disciplined. That’s because, unlike regular mortgages, you’re able to withdraw the money you deposit into your revolving credit, so it’s easy to spend it on other (more exciting) things. And because all your money, including your salary and savings, may be in the revolving credit it can be difficult to differentiate between funds earmarked for different purposes. 

That’s why, generally, revolving credits only work for those who can follow a strict budget and don’t overspend. 

They’re expensive

Chances are, the revolving credit portion of your mortgage will be more expensive than the rest. That’s because the rest of your mortgage will most likely be on a fixed interest rate, while your revolving credit will be on a variable rate. Variable rates are typically 0.5% to 2.5% higher than fixed rates. There may also be extra fees associated with a revolving credit. 

Make sure you do your homework before applying for a revolving credit.

Making a revolving credit work for you

If you spend most of the extra money you put into your revolving credit, having one may cost you money - rather than save you money. So, before you decide to get a revolving credit, it’s important to consider how disciplined you are with money and how much you’re typically able to save. After all, there may be no point having one if you don’t use it to make extra repayments. 

Generally, revolving credits work best to reduce interest charges and mortgage terms when they’re used as tools to enable savings goals. 

  • For example, your goal could be to put aside $1,000 each month. You could, instead, put this money into your revolving credit account. 

  • If you took out a $12,000 revolving credit you could pay the entire thing off within one year, cancel that revolving credit to reduce your loan balance - then rinse and repeat. 

If you had a $400,000 loan with an 8% interest rate and a 30 year loan term and you followed the above example, you could pay your loan off more than 14 years sooner and pay around $380,000 less interest. 

Get expert advice before signing on the dotted line

As you can see, if you’re disciplined with your money, a revolving credit can be an extremely useful tool - but if you’re not it could also be a costly mistake. If you’re not sure what’s right for you it’s always best to get specific, expert advice from a mortgage broker or financial advisor. They’ll be able to help you figure out whether or not you’ll benefit from a revolving credit and help you set your budget up correctly to ensure you do. 

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand mortgages and home loans sector. Nothing in this article constitutes a recommendation that any strategy, loan type or mortgage-related service is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice.


Ben Tutty
Ben Tutty

Ben Tutty is a regular contributor for Trade Me and he's also contributed to Stuff and the Informed Investor. He's got 10+ years experience as both a journalist and website copywriter, specialising in real estate, finance and tourism. Ben lives in Wānaka with his partner and his best mate (Finnegan the whippet).