What is a revolving credit mortgage?

A revolving credit mortgage is another name for a home equity line of credit, often used in countries such as New Zealand. A revolving line of credit lets you borrow up to a maximum limit based on your equity in property, and enjoy the flexibility to make repayments when you choose.

How does a revolving credit mortgage work? 

A revolving credit mortgage or home equity line of credit works similarly to an overdraft or a credit card. You apply with a bank or lender, which will set a maximum limit you can borrow, often based on your usable equity in a property. You can borrow up to this maximum limit and make repayments when you choose, and you’ll be charged interest only on how much you’ve currently borrowed, rather than the maximum limit.

What is my usable equity? 

Your equity is essentially how much of your property you own outright and doesn’t have a mortgage owing on it. You can estimate your current equity by taking the current value of the property (including any capital growth or loss it has experienced) and subtracting your outstanding mortgage principal.

However, because your lender will most likely want you to maintain a Loan to Value Ratio (LVR) of 80% or less to avoid requiring Lender’s Mortgage Insurance (LMI), your usable equity for applying for a home equity line of credit will typically be 80% of your property’s current value minus your outstanding mortgage principal.

For example, imagine buying a property for $500,000, paying a $100,000 deposit and taking out a $400,000 mortgage. After some time has passed, you’ve put $100,000 onto the mortgage, and your property’s value has also grown by $100,000 to $600,000. This would give you $300,000 in equity, but your usable equity would be 80% of $600,000 ($480,000) minus your remaining mortgage principal ($300,000), equalling $180,000.

How can I find my property value? 

You can get an estimate of your property value with a free property report from RateCity, which could be useful for performing your own calculations and working out if a revolving credit mortgage may be worth it.

However, when you apply for a home equity line of credit, your lender will require a professional valuation to find the exact value of your property. This may mean paying an extra charge to cover the valuer’s fee.

How much can I borrow with a revolving credit mortgage? 

Some lenders will allow you to borrow up to your usable equity with a home equity line of credit. However, others may set a stricter maximum limit to help reduce the risk of overborrowing and finding yourself in financial stress.

How do you apply for a revolving credit mortgage? 

Applying for a revolving credit mortgage will often mean refinancing your current mortgage, which involves a process not dissimilar to applying for a brand new home loan to replace your current loan. You’ll still need to provide information about your income and expenses to demonstrate that you can comfortably service the new loan. Your lender will likely also undertake a credit check, as well as a valuation of your property.

If you’re not sure whether a revolving credit mortgage will be the best choice for your financial situation, or if you’d like some assistance preparing your application for a home equity line of credit, you may be able to contact a mortgage broker for help.

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