Home loan channelling is the practice of routing your income — your salary, your business takings, any money that hits your account — through a specific part of your mortgage, instead of through a standard transaction account.
That specific part is usually a revolving credit facility. Lenders use different product names and terms, but the account generally combines a home loan balance with transaction access. And here's the key:
Every dollar paid into the account reduces the balance used for interest while that money remains there. Kiwibank and Westpac both describe interest on their revolving home loan products as being calculated daily. The exact charging and account terms come from the selected lender.
So if your salary lands on the 20th and your bills do not go out until later in the month, those dollars have spent days reducing your home loan balance. Do that every pay cycle and it can reduce interest, although the size of the benefit depends heavily on your spending and repayment behaviour. Our channelling calculator provides an estimate and explains the assumptions it uses.
How it actually works
Meet Sarah. She has a $600,000 home loan and earns $7,000 a month after tax.
The usual setup — Sarah's salary lands in her everyday account earning approximately zero. The bank charges interest on the full $600,000 every day, regardless of how much sits in her account.
The channelling setup — Her adviser splits the loan: a $50,000 revolving credit facility and a $550,000 fixed-rate portion. Her salary now deposits straight into the revolving account, immediately reducing that balance by $7,000.
She still pays her bills from this account. For the time her salary remains there before being spent, interest is calculated on a lower balance. Whether the complete structure costs less than an ordinary fixed loan depends on the revolving rate, account balance, fees and how much of Sarah's repayment budget would have been paid directly off principal anyway.
The three parts of a channelled mortgage
1. The fixed-rate portion — usually the larger chunk. It has regular repayments and a fixed rate for the agreed period. The available terms, early repayment limits and pricing depend on the lender.
2. The revolving credit facility — a smaller portion sized around the amount you can realistically control and reduce. Your income lands here and spending flows from here. The rate is floating and may be higher than a fixed rate, so making the limit too large can work against you.
3. Your everyday habits — channelling only works if you route money through the revolving credit account and keep the balance under control. Changing salary deposits and automatic payments is the setup. Sticking to the repayment plan is the harder part.
Where the estimated savings actually come from
There are two effects that are easy to mix together.
The first is ordinary extra repayment. If your income is higher than your living costs and required mortgage payment, you can use the difference to reduce principal. Paying the same amount directly into an ordinary loan can also reduce interest and shorten the term. That benefit does not prove that revolving credit is better; it proves that repaying principal faster matters.
The second is the temporary daily offset. Income paid into the revolving account lowers its balance before bills and other spending leave. This can reduce the interest charged during those days. The size of that effect depends on the timing and amount of real transactions, not just annual income.
A fair comparison must give both strategies the same monthly repayment budget. It should first show what ordinary extra repayments achieve, then compare that path with the split fixed and revolving structure. Our calculator now does that explicitly. It also shows that the remaining difference includes the effect of holding part of the debt at the floating rate. The tool approximates salary timing; it does not import or replay daily bank transactions.
That distinction matters. A result can show substantial interest reduction from the total repayment budget while the additional benefit of channelling is much smaller. It can also show an additional cost when the higher floating rate outweighs the daily balance reduction.
How to size the revolving portion
The revolving limit should be linked to a repayment plan, not chosen as a percentage by habit. Start with the after tax income expected to pass through the account. Subtract normal living costs, fixed loan payments and a realistic allowance for irregular spending. The remaining amount shows how quickly principal could fall.
Next, stress the plan. Consider an expensive month, a period of lower income and a floating rate increase. If the balance is likely to remain near the limit for a long time, that portion may be too large. Debt that is not receiving a meaningful daily offset or permanent repayment may be cheaper and easier to manage elsewhere in the loan structure.
The review should also cover the account limit after a chunk is cleared. Automatically transferring another fixed portion into revolving credit may not be permitted or suitable at that time. A lender may need to reassess a new split, and fixed lending can have break costs or early repayment restrictions.
Who may find channelling useful
The structure may be worth considering when income is regular, spending is controlled, a genuine monthly surplus exists and the borrower is comfortable seeing everyday transactions inside a debt account. It can also be useful for households that want one visible balance and are prepared to maintain a cash buffer within the facility.
It may be a poor fit where income is unpredictable, spending frequently reaches the limit, the available surplus is small, or the account would make budgeting harder. Someone who prefers separate spending and debt accounts may achieve a more reliable result with scheduled extra repayments instead.
There is also a behavioural risk. An available revolving limit can feel like savings even though drawing it increases home loan debt. The facility needs a clear floor or reduction target and an agreement about which expenses can be paid from it.
What to compare before changing the loan
Ask for the comparison in dollars as well as rates. It should include:
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The amount held on fixed and revolving rates.
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Required repayments and the total monthly repayment budget.
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Product fees and any cost of changing the current fixed loan.
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The result from making the same extra payment directly to a standard loan.
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A higher floating rate and a lower monthly surplus as stress cases.
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Rules for extra repayments, redraw, limits and closing the facility.
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What happens when the current fixed term expires.
If the recommendation relies on perfect spending every month, it is not a robust recommendation. The structure should still be manageable when normal life is less tidy than the spreadsheet.
Review the structure after it starts
The first review should compare the plan with actual account behaviour. Check the average revolving balance, the amount permanently repaid, the floating rate paid and whether spending repeatedly returned the account to its limit. If the expected surplus did not appear, the answer may be a smaller revolving portion or a simpler repayment structure rather than a more optimistic forecast.
Review again before a fixed term expires, before transferring another chunk, and after a material change to income or expenses. Ask the lender or adviser whether changing the split creates break costs, fees or a new credit assessment. Keep a separate record of the original purpose and expected result so the review is based on evidence rather than the feeling that money has moved through the account.
Channelling is a loan structure, not a substitute for emergency savings, insurance or a sustainable household budget. The account should help make progress visible without making every unexpected cost dependent on drawing more home loan debt.
Why the structure can be missed
Revolving credit is only one of several home loan structures, and it does not suit every borrower. It can be overlooked when the conversation focuses mainly on the fixed rate. The product requires budgeting discipline and usually carries a variable rate, so the trade offs need to be considered alongside the potential benefit.
What each bank offers
| Bank | Revolving product |
|---|---|
| ANZ | Flexible Home Loan |
| ASB | Orbit Home Loan |
| BNZ | Rapid Repay Home Loan |
| Westpac | Choices Everyday |
| Kiwibank | Revolving Credit Home Loan |
Common mistakes
- Making the revolving credit too big. If it's larger than your monthly buffer can pay down, you're paying a premium rate on debt that could sit on the cheaper fixed loan.
- Treating it as spending money. It behaves like an overdraft — you can draw on it anytime. That's the feature and the trap.
- Forgetting to change the salary deposit. People set up the structure then forget to tell payroll the new account number.
- Not reviewing annually. A channelling setup that was perfect two years ago may need tweaking today.
This guide is general information and does not take your personal situation into account. It is not personalised financial advice. Lending is subject to credit criteria, fees, and terms.