Get Sorted: How to manage a revolving mortgage like a pro

What if you could pay off your mortgage sooner than planned? Photo / 123RF

What if you could pay off your mortgage sooner than planned? Revolving mortgages are a valid option here in New Zealand - use them the right way and you could be on the fast track to being mortgage-free and pay thousands less in interest.

Of course, that's assuming that you spend less than you earn, and your surplus income goes towards reducing the principal!

Think of a revolving mortgage like an immense overdraft. Your balance goes up and down as money flows in and out of your account. Interest is calculated daily on the balance, so the idea is to keep it low by leaving behind as much money in the account as possible at the end of each pay cycle. They can work well for people with lumpy incomes, because there are no fixed repayments.

Here's more about the different types of mortgages out there.

Occasionally we get questions from readers about how best to manage a revolving mortgage, so we asked David Boyle, Group Manager for Education at the Commission for Financial Capability, for his top tips.

Here's what he had to say:

You need a budget

"Make sure you include your mortgage commitment as part of your living expenses. By that I mean each fortnight or month the overall principal should be coming down by at least that amount.

"It's so important to have a budget so you know exactly where your spending is going. Don't forget about those less frequent bills you might pay quarterly or annually, and things like dentist visits and car repairs.

"In a nutshell, if you are able to budget and stick to it then this is for you. If you are likely to not stick to a budget and perhaps look to use the mortgage money for buying other stuff, then it's not!"

Otherwise, it's easy to get in over your head

"It can be really easy not to pay the mortgage - some get into trouble. They use it as an overdraft instead of leaving enough to bring down the mortgage, which is very dangerous given the length of the loan term, and compound interest cost can really start getting out of hand.

"The other risk is that if interest rates go up, your total mortgage repayments will also go up. This means you eat away at less of your principal (unless you spend less and leave more in your account towards your mortgage) and instead mostly pay interest."

Run your own numbers using Sorted's budgeting and mortgage tools to see if the revolving mortgage option makes sense for you.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and tools from Sorted – brought to you by the Commission for Financial Capability – at sorted.org.nz.