Understanding Revolving Credit vs Offset Home Loan in Saving on Interest Cost



We often have the question posed around how best to pay off your home lending quicker or how best to structure your mortgage set up to cater for different financial needs and goals.
Two popular choices are revolving credit facilities and offset home loans. Both these options provide unique benefits that can help homeowners save on interest costs over the long term. In this blog, we will delve into the differences between these two types of home loans and explore how they can be effectively used to reduce interest expenses.

Revolving Credit Facility:

Flexibility and Control—A revolving credit facility is a type of home loan that operates much like a large overdraft. The borrower is given a credit limit, and they can withdraw or deposit funds within that limit at any time. The key advantage of a revolving credit facility is its flexibility. You have the freedom to make additional repayments whenever you have extra funds, and you can also withdraw these funds when needed, making it an ideal choice for those with fluctuating incomes.

Offset Home Loan:

Maximizing Savings—An offset home loan, on the other hand, is linked to a savings or transaction account. The balance in this account “offsets” against the outstanding loan balance, reducing the interest calculated on the loan. The more money you keep in your offset account, the less interest you’ll pay on your mortgage. This setup allows you to save on interest costs without making extra repayments.

Interest Savings Comparison:

Let’s break down the interest savings potential of these two options with an example. Consider a homeowner with a $500,000 mortgage, a 4% interest rate, and $20,000 in savings.

Revolving Credit Facility: If the homeowner puts their $20,000 in savings into the revolving credit facility, they would only be charged interest on the remaining $480,000. Over time, this can result in substantial interest savings.

Offset Home Loan: With an offset home loan, the $20,000 in the linked account offsets against the $500,000 mortgage balance. This means the homeowner pays interest only on $480,000, similar to the revolving credit facility. However, in this case, the interest savings could be even greater if the homeowner continues to add to their savings account and make the same loan repayments to the loan.

Choosing the Right Option:

The choice between a revolving credit facility and an offset home loan depends on your financial circumstances and preferences. If you value flexibility and control over your repayments, the revolving credit facility might be more suitable. On the other hand, if you want to maximize your interest savings without making additional repayments, the offset home loan could be the better choice.

Both revolving credit facilities and offset home loans offer effective ways to save on interest costs over the life of your mortgage. While revolving credit provides flexibility in managing your repayments, the offset home loan allows you to reduce interest expenses by maintaining a balance in a linked account. Ultimately, the right choice depends on your financial goals and how you prefer to manage your mortgage. Our Mortgage Advisers are always free to discuss these further with you in more detail on how this can fit into your home loan set up for you to optimise best value to achieve your goals.

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