Flexi loans - how good are they?

Posted by: Greg Scott on 26 May 2007

Simply put, a flexi loan (also known as a revolving credit facility) is like a large long-term overdraft but at housing interest rates. It provides two major benefits: significantly reducing your interest costs, and the flexibility provided is unparalleled.

Reducing Your Interest

There are 3 main strategies to reduce the interest cost and each of these is detailed below:

1. Flexi loans are typically loaded against your everyday cheque account with interest being charged on a daily basis (the outstanding balance at the end of each day). Therefore, by having your salary and any other income you receive direct credited (thus reducing the outstanding balance), you will immediately reduce your interest cost.

2. Coupled with the point above, another increasingly popular way to reduce the interest cost is to pay your day-to-day bills and expenses with your credit card. The benefit of this is that these funds are left in your account thus reducing the loan balance and the interest charged. When you receive your credit card statement you simply pay the credit card off (in full) by transferring funds from your flexi loan. It is important to note that this option is only cost effective if you ensure that each month you fully repay your credit card otherwise the interest charged on the credit card will outweigh the interest saved on the flexi loan.

3. Also, by crediting any savings you may have into your flexi account you reduce the outstanding balance of your loan - again reducing your interest cost. This is a significant advantage over having those funds saved in a separate bank account as the interest saved on your flexi loan will be greater than the interest earned on your savings account, especially when considering that the interest earned would also be liable for withholding tax.

Unparalleled Flexibility

1. You can withdraw money from your revolving credit loan (up to your approved limit) whenever you want and for whatever reason. So, as you pay money off your loan you are able to withdraw it again, up to your limit, no questions asked.

2. Access to the loan is also very easy with most lenders offering you cheques, ATMs, EFTPOS, telephone banking, and even on-line banking as ways to withdraw money from your loan.

3. The only repayments you are required to make are the monthly interest costs. Other than this there are no set principal repayments; principal is repaid from the surplus funds left in the account.

4. Lump sum payments of any amount can be made at any time with no cost or penalty to you. This is especially attractive to people with irregular incomes (self employed, bonuses, commission etc).

Are There Any Downsides?

With the ability to withdraw funds at any time there is the potential that in future years you will look back and find that you haven't paid anything off your loan. In addition to this, flexi loan interest rates are 'variable' rates and these are currently ? to 1% higher than fixed rates. However, by limiting the flexi loan to a small portion of your total lending (typically limits range from $10,000 to $40,000) you reduce the impact should you not repay the loan (as you'll be repaying the larger fixed portion).

In Summary

If used wisely, flexi loans can save you significant amounts of interest and provide very real benefits in terms of flexibility. The potential downsides of the flexi loan can be minimised by having only a small portion of your total lending as a flexi loan with the balance on a fixed rate term. This structure provides the 'best of both worlds' - the flexibility and interest saving potential of the flexi loan and the lower interest rate and stability of the fixed rate loan.

- By Greg Scott, Director and Mortgage Broker, The Home Loan Shop. If you have a question for Greg, please contact Inform.