James PuahRevolving credit and offset home loans are two options that can help you manage your home loan and ultimately save a huge amount of interest: however most people know don’t really know how these products differ or know what would suit best.
I decided to provide an explanation on how these two products work, and to also include the pros and cons on both the revolving credit and offset home loans.
Revolving Credit Home Loans
Revolving credit home loans works like a large overdraft or credit card.
It means that you have access to money (within your credit limit) and only pay interest when you are using that money.
Like a revolving door, you can “revolve” your money in and out of the account and you only pay interest on what money you are using on any day. If you can pay off the balance in full then no interest will accrue from that date.
The various banks have names for these accounts and some have a non-reducing limit (like an overdraft or credit card limit) while others have a reducing limit so effectively they get paid off like your normal home loan too.
Many Kiwis love the flexibility that a revolving credit mortgage offers, but you need to be disciplined to get the most from these types of accounts.
They are not for everyone.
Offset Home Loans
Offset home loans are only currently offered by three banks in New Zealand; BNZ, Kiwibank and Westpac. These loan have advantages in some situations, but they are a bit of an unknown type of account.
An Offset home loan can help reduce the amount of interest you pay on your home loan, by using money in your everyday and savings account to ‘offset’ your home loan interest charges.
The banks differ slightly on how they operate offset home loans, but the advantages are;
- You can keep a balance in your everyday account and use this to offset your home loan interest.
- You can keep a balance in your business account and use this to offset your home loan interest.
- Even your parents can keep a balance in their everyday account and use this to offset your home loan interest.
Westpac have a good offset calculator on their website which you can use to see how it could work for you.
Its quite a simple concept really, but often not well explained but these are something that I often suggest this as a good way to manage your home loan.
