A revolving credit mortgage functions similarly to an all-in-one bank account with a substantial overdraft feature. It allows you to borrow, deposit, and withdraw at your discretion as long as you stay within your borrowing limit.
What is a Revolving Credit Mortgage?
A revolving credit mortgage, often used in countries such as New Zealand, is another name for a home equity line of credit. In this type of mortgage, you can borrow up to a maximum limit based on your equity in the property, and you have the flexibility to make repayments when you choose.
How Does a Revolving Credit Mortgage Work?
A bank or lender provides a revolving credit mortgage or home equity line of credit, similar to an overdraft or a credit card. The lender sets a maximum limit for borrowing, usually based on your usable equity in the property. You can borrow up to this limit and repay the borrowed amount at your convenience. The interest is charged only on the currently borrowed amount, not the maximum limit.
What is Usable Equity?
Usable equity refers to the portion of your property that you own outright without any mortgage owed on it. To estimate your current equity, subtract your outstanding mortgage principal from the property’s current value, considering any capital growth or loss. However, to avoid requiring Lender’s Mortgage Insurance, lenders typically expect you to maintain a Loan Value Ratio of 80% or less. Therefore, your usable equity for a home equity line of credit application is generally 80% of your property’s current value minus your outstanding mortgage principal.
For instance, suppose you purchase a property for $500,000 with a $100,000 deposit and a $400,000 mortgage. After some time, you make a $100,000 payment towards the mortgage, and the property’s value increases by $100,000 to $600,000. In this case, your equity would be $300,000, but your usable equity would be $480,000 (80% of $600,000) minus $300,000 (remaining mortgage principal), totalling $180,000.
How Can I Determine My Property Value?
When you apply for a home equity line of credit, your lender will require a professional valuation to determine the exact value of your property. This may involve an additional charge to cover the valuer’s fee.
How much can I borrow with a revolving credit mortgage?
Some lenders may allow you to borrow up to your usable equity with a home equity line of credit. However, others might set a stricter maximum limit to reduce the risk of overborrowing and potential financial stress.
How Does the Interest on a Revolving Credit Mortgage Work?
The interest on a revolving credit mortgage operates in the following manner. These mortgages typically have a variable interest rate that fluctuates following market rates. Generally, the interest rate aligns with the standard floating or variable mortgage rate prevailing at any time.The interest calculation occurs daily, considering the account balance at that specific time. Subsequently, the interest amount is deducted from the mortgage account fortnightly or monthly.
How Do I Apply For A Revolving Credit Mortgage?
Applying for a revolving credit mortgage usually involves refinancing your current mortgage, a process similar to applying for a new home loan to replace your existing one. You must provide information about your income and expenses to demonstrate that you can comfortably manage the new loan. Additionally, your lender will conduct a credit check and evaluate the value of your property through a valuation.
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