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What is a revolving loan?

 A revolving loan allows you to reduce your mortgage and interest payments by putting all your money: your savings, salary and mortgage in one account.

However, as you take money back out to pay for things such as groceries and utilities, your balance will come back up and with it, your interest repayments.

Pros of a revolving loan:

• You can make lump sum payments into your account and take the money back out if it is needed to cover additional expenses or months where you might earn less.
• Any additional money can be paid in a lump sum to reduce your mortgage quickly.

Cons of a revolving loan:

• All your finances are kept in one account, this can make budgeting more difficult.
• Revolving loans have floating interest rates which tend to be higher than fixed-term mortgage rates, this needs to be taken into account and budgeted for. 

Who would benefit from a revolving loan?

If your income varies month to month a revolving loan allows you to make repayments to your mortgage in prosperous months, whilst still allowing you to dip into your savings in months where you make less.  Equally, if you have a high salary and a high amount of savings, then you would also benefit from a revolving loan as you could quickly reduce your mortgage and interest payments.

What is an offset loan?

An offset loan uses your savings in designated accounts to reduce the interest payments on your mortgage.

For example if your mortgage is $600,000 and you have an account with $30,000 of savings, then rather than pay interest on the full mortgage you would pay interest on $570,000 ($600,000 minus your savings).

Pros of an offset loan:

• It allows you to make the most of your savings, not only do you still have access to them, but they also reduce your interest payments.
• You can decide what to do with any extra money you have, either use it to pay off your mortgage or add it to your savings and reduce your interest payments.
• You can have multiple accounts linked to your mortgage and some banks will let you offset family members’ accounts.
• Your savings and mortgage are in separate accounts making it easier to budget.

Cons of an offset loan:

• Savings in offset accounts do not accrue interest, but equally will not need to pay tax on this interest.
• The money in your offset accounts do not go towards the mortgage, you will still need to make mortgage payments.
• Offset mortgages have floating interest rates which tend to be higher than fixed-term mortgage rates, so you need to budget for fluctuations.
• Once you have made a payment to your mortgage you cannot get this money back.

Who would benefit from an offset loan?

If you prefer to keep your savings and mortgage separate then an offset loan gives you this option. Plus, if you have a large amount of savings accruing little interest, you can make your savings reduce your interest payments whilst still being available to use when needed.

Should you choose a revolving loan or an offset loan?

The answer to this is, it depends! It depends on what works best for you. If you tend to have a more variable income then a revolving loan could be the right option, whereas if you have a high salary or a large amount of savings then a revolving loan could be better.

It’s important to speak with a financial advisor so that you can make the most informed decision for your circumstances and how you are looking to pay for your home or build your property portfolio.

Please note this is just general information, for advice tailored to you, get in touch with the team at Finance Hub by calling 0800 346 482 or contacting us here.