Revolving Credit account

[Monid]

Conventional Wisdom these days seems to recommend having split loan with some portion on revolving credit and the rest fixed. When we first got a loan this is what we did, tempted by the possibility of paying our house off faster as the banks tell you, you can with the revolving credit account, and the interest we would save by keeping money in that account till the last minute.

To some degree it worked, but never to a greatly satisfactory degree, and given the current disparity between the floating and fixed rates, given our fixed loan was up for renewal on the 12th of Jan, we have just added our RC account balance to our fixed loan. When we looked at the numbers, the difference in interest rates, was costing us more than we were saving.

I was wondering what do people think about this, was there some other better reason to keep a RC account. (I might add this has also made tracking money much easier, we now have a savings account, a current account for us and a current account for our properties)

Cheers David

[Gerrard]

Agree on the rates. I'm quite happy to fix as much as possible, then set higher then minimum repayments. It becomes a form of budget control too when there is definite amount going out each time, rather than the temptation of using the RC for other things.

Having said that I do like to keep a good RC limit up my sleeve for emergency situations, or being able to pull 20% of a purchase out of one bank and going to another bank for the loan.

Gerrard

[pixie]

Banks make a lot of money offering the revolving options because the vast majority of people do not pay their loan off faster. Many use the loan facility like a cheap overdraft and go out and spend up just as fast as they make progress on it.

I have friends who decided to buy an updated vehicle, visit the relatives in the UK etc.

My banker once gave me a statistic on how many of their customers used the revolving loan to pay off their homes faster - I forget the figure but it was scarily low !

These loans are wonderful for people who have varying income eg self employed and / or who are disciplined enough to pay the loan off faster. Otherwise they can be a huge trap.

[drelly]

I second that... RC only works if you're disciplined and *know* you're going to pay it off. Potential disaster otherwise...

[fudosan]

Isn't "descipline" a pillar to property investing?

[AIL]

R/C To be or not to be

Revolving Credit (R/C) are purely a set overdraft limit at residential loan rates. They are not for everyone although can be a very usefull part of an investor's overall investment strategy.

As a mortgage broker, I recommend a strategy to their loans. Often I've come accross investors who may have a property investment strategy, but not so regarding their loans.

The crucial point with R/C facilities (Flexi accounts) is that you do save big time if you keep the loan balance down, Conversely, this will cost you big time if you don't. You would definitely not give this facility to someone who cannot handle credit cards for instance.

The secret is to be self disciplined, but also assess how much you can pay off comforatably on your flexi accounts.

There are other tips & techniques that form an overall loan strategy, of which a R/C is but one part; for instance to ensure against fluctating interest rates & get the best rate (not necessarily the Cheapest), how to handle running off on discretionary spending.

All too often people have no clue as to where their Flexi balances should be & how to well they are doing or not. I see one extreme where people save hard in their flexi and thus have no lifestyle, to the other where they have too much lifestyle having access to easy credit.

At the Gandalf Group, we provide a mortgage management report that shows a "big picture" on how effective their flexi a/cs can be, without changing their lifestyle (conservative). Clients need such a report as a minimum to see if such a facilitywould be usefull to them BEFORE they take on such a facility.

Clients need such a report to track month by month where their flexi balances should be, how well they are doing, & take steps to manage accordingly. We've had clients who have hopped off & on the R/c bandwagon based on sound strategy & on-going planning.

Who bothers to get "the big picture" of their lifestyle when determining the appropriate loan structure? Who bother's to monitor it thereafter?

I have experienced many clients, including myself, who have managed to pay off large chunks of their loans - with the correct tools & disciplines in place (Isn't that true with anything in life).

Again, a flexi facility is great for access to emergency funds & handling cashflow fluctuations.

One big issue with R/C is no guarantee of debt reduction. You can be "maxed out" on your limit (until bank review time - normally every 5 years) or until the interest payments start to hurt!

An effective alternative is a redraw facility. Works exactly like a R/C except that the limit comes down on a table (Principle & Interest) basis.
So you have the ability to pay in extra and draw this back up again, but only up to the reducing limit. Thus this facility forces you to pay off your loan.


So use these facilities wisely & they can be your best friend. Don't & they can be your worst enemy!

[CJ]

The way I calcuated my RC amount was the amount I expected to be able to pay of within 2 years (I had a three year fixed). My RC is now down to zero 1 1/2 years in so not paying the high rates, but it gave me the flexability to pay off quickly. Maybe I should have gone an extra $10k, but I was not expecting my current situation.

If I was to renew now, i would do the same again. Though if I had excess equity, I would ask for a RC up to that amount (even if not all used) to give me flexablity to buy at a later date. Just because you have an RC, doesn't mean you have to use it.

[Marcus]

Just because you have an RC, doesn't mean you have to use it.

Too true. I have $65 - $70k sitting available burning a hole in my pocket

How much are those 300Kw Monaros???

Yeah right!

I would rather use it on another deal or reduce some "Fixed debt" somewhere at some stage.

That car does sound tempting though...... Brmmmm brmmm!

[drelly]

I have the same problem Marcus! Got the cash but nowhere to spend it! I'm finding it extremely difficult to find anything that is positively geared here right now.

[kalovatt]

Ditto guys. Got about 150K in unused flexi which has been sitting there for a while now. Have found nothing at all suitable to buy.
Still , it can just sit there, I am in no rush.

As mentioned here, they are great but not for the undiciplined.

[fudosan]

Me too. Patience is my strength.