What Does Undrawn Revolving Credit Mean — Do I Pay Anything When I'm Not Using It?

What Does Undrawn Revolving Credit Mean — Do I Pay Anything When I’m Not Using It?

For UK property investors and buy-to-let (BTL) landlords, maintaining healthy cash flow is essential for growing a portfolio. Traditional financing options can sometimes feel restrictive, requiring you to take out large lump sums and pay interest on the entire balance from day one. This is why many property professionals are turning to secured revolving credit facilities.

Often described as a property overdraft, a revolving credit facility allows you to draw funds, repay them, and draw them again as needed without submitting a new application each time. However, landlords frequently ask: what does undrawn revolving credit mean — do i pay anything when i’m not using it? Understanding how these facilities are structured can help you manage your portfolio’s finances more efficiently.

Understanding Undrawn Revolving Credit

To understand undrawn revolving credit, it helps to look at how a secured revolving facility is set up. This is a secured financial product, which sits as a second charge behind your existing first-charge mortgage on a residential buy-to-let property. It is not an unsecured business loan, a personal credit card, or a generic business line of credit.

When you arrange this facility, a lender approves a maximum borrowing limit based on the equity in your property. For example, you might be approved for a facility limit of £150,000.

• Drawn Credit: This is the amount of money you have actively transferred out of the facility and into your bank account. If you draw £50,000 to fund a property refurbishment, your drawn credit is £50,000.
• Undrawn Credit: This is the remaining portion of your approved limit that you have not yet touched. In the example above, your undrawn revolving credit would be £100,000. It is a reserve of cash waiting for you to use when the need arises.

Do You Pay Anything When Your Credit is Undrawn?

The primary benefit of a secured revolving credit facility is its cost-efficiency. With traditional loans, you pay interest on the entire loan amount. With a revolving credit facility, the charging structure is much more flexible.

Interest Charges

You typically do not pay interest on your undrawn revolving credit. Interest is only calculated and charged on the active, drawn balance. If your facility limit is £100,000 and your drawn balance is £0, your interest charges for that period will be £0. This makes the facility incredibly useful as an emergency fund or a standby facility for sudden investment opportunities.

Non-Utilisation or Commitment Fees

While you do not pay interest on undrawn funds, some lenders may charge a small ongoing fee to keep the facility open and the funds reserved for you. This is often referred to as a non-utilisation fee or a commitment fee. It is typically calculated as a very low annual percentage (often between 0.1% and 0.5%) on the undrawn portion of your limit, billed monthly. Not all lenders charge this fee, so it is important to check your specific product illustration before proceeding.

Upfront Setup Costs

Because this is a secured second-charge facility, there are initial costs to set it up. These may include valuation fees, legal costs, and broker arrangement fees. These are one-off costs paid during the initial setup phase. Once the facility is active, you do not pay these fees again when drawing down or repaying funds.

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Comparing Revolving Credit to Bridging Finance and Remortgaging

To fully appreciate the value of a secured revolving credit facility, it is helpful to compare it to the traditional financing routes landlords generally use: bridging finance and remortgaging.

Bridging Loans

Bridging loans are commonly used for short-term property needs, such as buying a property at auction. However, bridging loans are typically structured so that interest rolls up on the entire loan amount. This means you do not make monthly payments, but you pay interest on the full balance from day one, even if you do not spend all the money immediately. This can make bridging an expensive option if your funding needs are staggered over several months. Additionally, bridging loans are usually closed-ended, meaning they must be paid off by a strict deadline.

Remortgaging to Release Equity

Remortgaging involves replacing your current first-charge mortgage with a larger loan to release cash. While interest rates may be lower, the process is slow, often taking weeks or months. Furthermore, you must pay interest on the entire lump sum immediately, even if the cash sits idle in your bank account. You may also face expensive early repayment charges if you break your existing mortgage deal early.

Secured Revolving Credit

By contrast, a secured revolving credit facility sits behind your existing mortgage, leaving your current low interest rate untouched. Once arranged, funds can typically be drawn in 24 to 48 hours. It offers the speed of a bridging loan with the flexibility of only paying interest on what you actually draw down.

For more detailed information on borrowing options, you can review MoneyHelper advice on secured borrowing to see how different forms of debt can affect your overall financial strategy.

Real Landlord Scenarios: Using Drawn and Undrawn Credit

Understanding how drawn and undrawn credit works is easier when looking at real property investment scenarios:

• Refurbishments and EPC Upgrades: A landlord wants to upgrade the Energy Performance Certificate (EPC) ratings on three properties in their portfolio. They set up a £60,000 revolving credit facility. They draw down £20,000 to upgrade the first property. While they carry out the work, they only pay interest on that £20,000. The remaining £40,000 sits as undrawn credit, costing them nothing in interest. Once the first property is re-let and refinancing is complete, they repay the £20,000 and repeat the process for the next property.
• Auction Purchases: A landlord wants to bid at a property auction. They arrange a secured revolving credit facility in advance. The undrawn credit sits ready. When they win a bid, they draw down the deposit immediately, allowing them to complete the purchase quickly. They then secure a traditional mortgage to repay the drawn balance, returning their facility to its fully undrawn state.
• Void Period Cover: If a property sits empty between tenancies, a landlord may draw a small amount from their facility to cover the first-charge mortgage payments and maintenance costs, repaying it as soon as a new tenant begins paying rent.

Risk and Compliance Warning

While a secured revolving credit facility offers high flexibility, it is a serious financial commitment. Your property may be at risk if repayments are not made. Because the facility is secured as a second charge against your residential buy-to-let property, failing to meet your repayment obligations could lead to legal action, additional administrative charges, increased interest rates, or ultimately, the repossession of your property. Always ensure you have a clear repayment plan before drawing down funds.

How Promise Money Can Help

Promise Money is an FCA-authorised broker (Ref: 681423), not a direct lender. We work on your behalf to compare the market and find the most suitable secured revolving credit facilities for your circumstances. Our team can help you understand the fee structures, interest rates, and terms offered by various specialised lenders.

To discuss your options with a specialist adviser, you can call Promise Money on 01902 585020 or visit our online information hub at promisemoney.co.uk/landlord-revolving-credit-100.

People also asked

What is the difference between a secured and unsecured revolving credit facility?

A secured revolving credit facility is backed by an asset, such as a second charge on a buy-to-let property, which typically allows for larger credit limits and lower interest rates. An unsecured facility, like a business credit card, does not require property security but usually comes with much lower limits and significantly higher interest rates.

Can I keep a revolving credit facility open indefinitely?

Most secured revolving credit facilities are set up with a specific term, which may range from one to five years. During this term, you can draw down, repay, and redraw funds as often as you like, provided you remain within your credit limit and meet your repayment obligations.

Are there charges for drawing down funds once the facility is active?

Some lenders may charge a small administration or bank transfer fee each time you request a drawdown of funds, while others offer free drawdowns. It is important to review the terms of your specific product illustration to understand these minor operational costs.

Do I need permission from my first-charge mortgage lender?

Yes, because the revolving credit facility is secured as a second charge against your buy-to-let property, you will generally need to obtain consent from your existing first-charge mortgage lender before the facility can be finalised.