Line of Credit Loans

Line of credit home loans have become popular due to their flexibility and loan features. Put simply, a line of credit is a credit facility secured against your residential property and connected to your home loan. You can set these up in a way to pay your/your partner’s income directly into your home loan and simply access the funds via a credit card/EFTPOS card, cheque book or through Internet and phone banking facilities. This allows you to access the equity built up in your property to pay for bills or withdraw cash up to a certain pre-arranged limit quite easily. The money spent using the credit card is then paid off in full or on a monthly basis (during the interest-free period of the credit card, for example). Each month, the amount owing is reduced by the amount of money being paid into the home loan and then increased by the amount of money being paid out on the credit card or withdrawn in cash. If you consistently have more money being paid into the home loan than coming out, this can be a very useful facility and provide some freedom.

Line of credit home loans can be used by owner-occupiers or for investment properties. Provided you make your minimum repayments each month, you can use the equity built up in your property to easily manage your finances, including being able to quickly access the funds needed to renovate, pay for a holiday, purchase a motor vehicle or to invest.

What should I look out for?

A line of credit home loan can become very costly if the balance of the home loan is not regularly reduced. It requires an interest only repayment as a minimum each month, however, if you do not continuously pay down the principal, this can add up to paying a lot of interest over the life of the loan.

Advantages

• Easy access to funds (up to your credit limit) and a level of financial freedom
• Often you can have a larger credit limit compared to average credit cards
• Interest rates tend to be lower than credit cards because they are charged at a home loan rate
• Interest repayments can be minimised by directing all of your income into your home loan and thereby reducing the balance sooner (if you’re disciplined, you can pay off your home loan faster this way)
• You can consolidate debt like credit cards and personal loans into your line of credit home loan

Disadvantages

• Like any credit card, a line of credit home loan requires some discipline and budgeting skills to get the most out of it. Make sure you do not live beyond your means or fall behind, or you might just end up paying more in interest charges in the long run.