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Offset loans vs revolving credit: Pros and cons

Offset loans vs revolving credit: Pros and cons

June 11, 2024

At Benchmark Mortgages, we frequently encounter inquiries regarding the most effective methods for accelerating mortgage repayments or structuring mortgage arrangements to accommodate diverse financial objectives.

The two options that stand out are revolving credit facilities and offset home loans; each offers distinct advantages that can assist homeowners in minimising long-term interest expenses.

By understanding the pros and cons of each, you will be better equipped to choose the option that best suits your financial goals.

Offset loans: Benefits and considerations

The first difference between offset loans and revolving credit is in functionality. With a revolving credit facility, you have one giant overdraft account where any savings you wish to offset must be deposited.

On the other hand, an offset loan allows you to use multiple accounts for savings. For example, if you have a $100,000 offset loan and $30,000 spread across various accounts, you will only pay interest on$70,000 instead of the entire $100,000.

Offset loans offer unique advantages that can significantly impact your mortgage experience. Here are the key pros and cons to consider:

The pros of offset loans

Interest Savings - One major benefit of an offset loan is the potential for interest savings. By offsetting your mortgage with funds held in a linked savings or transaction account, you effectively reduce the amount of interest charged on your loan.

Flexibility - Offset loans provide greater flexibility in terms of the savings accounts you can link to your mortgage. This feature is particularly attractive for individuals or families with multiple accounts they wish to utilise for offsetting purposes. Using various accounts gives you more control over the interest charged on your loan.

Potential Tax Advantages - Offset loans can offer potential tax advantages for property investors. Any funds offsetting your mortgage are not considered taxable income, which can reduce your overall tax liability. This advantage is worth considering if you want to optimise tax efficiency with your property investments.

The cons of offset loans

Limited Availability - Offset loans are currently available only through a select number of banks, such as Westpac, Kiwibank, and BNZ. This limited availability may restrict your options when choosing a lender.

Higher Interest Rates - In some cases, offset loans may have slightly higher interest rates than other loans. It's essential to compare interest rates offered by different lenders to ensure that an offset loan remains a financially viable option.

Revolving credit: Exploring the benefits and considerations

Revolving credit facilities offer their own set of advantages and considerations. Here's what you need to know:

The pros of revolving credit

Flexibility in Repayments - Revolving credit facilities allow borrowers to repay extra without penalty. This can be particularly beneficial if you have fluctuating income or irregular cash flow. You can pay off your mortgage faster during periods of financial surplus or reduce your monthly repayments during leaner times.

Access to Funds - Revolving credit facilities provide access to additional funds up to an approved limit. This flexibility can be handy for emergency expenses or unforeseen financial needs. By tapping into this line of credit, you can address urgent financial obligations without applying for a separate loan.

Availability - Revolving credit facilities are widely available at every major bank in New Zealand, with limits typically ranging from $200,000 to $350,000.

The cons of revolving credit

Potential for Uncontrolled Spending - While the flexibility of revolving credit can be advantageous, it also comes with the risk of uncontrolled spending. Access to additional funds may tempt you to overspend, potentially leading to increased debt if proper financial discipline is not maintained.

These loan facilities often require more financial maturity and discipline to manage effectively. If you struggle with budgeting or prefer more structured financial arrangements, alternative loan options may better suit your needs.

Preference for property investors

Property investors generally lean towards the offset loan when choosing between the two options. An offset loan provides more control and flexibility, especially if you have multiple rental accounts that can be used to offset your mortgage. However, it's worth noting that are volving credit facility can still effectively serve your needs.

The choice depends on how you plan to manage your finances and utilise the features of these mortgage options. In any case, it's best to seek guidance from a mortgage broker who can advise you on the best option according to your situation.

What's the best option for you?

Both offset loans and revolving credit facilities offer distinct advantages and considerations. But ultimately, it comes down to your financial situation and how you prefer to manage your mortgage.

The revolving credit facility may be the most suitable if you value flexibility and autonomy in managing your repayments. The offset home loan could be better if you aim to maximise interest savings without increasing your repayments.

If you’re struggling to decide what option is best for you, we’re here to help guide you every step of the way. At Benchmark Mortgages, we strive to simplify the complex world of mortgages and provide expert advice for your financial goals.

You don’t have to do it alone. Contact us today to explore your options.

This article is of general nature and should not be taken as advice. Please get in touch with a chartered accountant to discuss your tax requirements

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