A line-of-credit home loan is a flexible loan that allows you to borrow money up to a certain limit and repay it over time. It works like a credit card, giving you access to funds when needed and charging interest only on the amount you use.
It can be secured or unsecured. A secured line of credit is backed by collateral, such as property, whereas an unsecured line of credit does not need collateral.
A line-of-credit home loan is a secured line of credit. This allows you to access the equity you’ve built in your home as a revolving credit facility.
What Is A Line-Of-Credit Home Loan?
A line-of-credit home loan is a revolving credit facility that allows you to access your home’s equity when you need extra funds. It provides a pre-approved credit limit, and you can borrow funds as needed, repay them and borrow again up to the limit.
Interest for the line of credit is charged only on the outstanding balance.
A line of credit is best used by:
- Self-employed individuals, freelancers or commission-based earners, who might have fluctuating income, to manage cash flow effectively.
- Borrowers who can regularly pay down the balance will benefit from the flexibility while minimising interest costs.
- Investors or homeowners looking to renovate, as it provides convenient access to funds without the need to apply for a new loan.
- Withdraw large sums of money with ease and flexibility.
- Access lower interest rates compared with personal loans or credit cards. Pay interest only on the amount you draw down from the line of credit.
- Use it to increase the value of your home through renovations.
- Some lenders allow interest capitalisation, meaning repayments may not be required immediately. However, this increases the loan balance over time and may lead to higher costs.
- The borrower’s home will be kept as collateral and they may lose their home in case of foreclosure.
- Attached to variable rates, which can move up and down without warning.
- Banks are liable to freeze a line of credit in a downturn.
- Hard to get against non-owner occupied properties.
- They are a great risk if you have poor financial discipline.
- A higher interest rate than a standard loan, so it requires stronger borrowing power to qualify.
- Lenders generally cap the amount you can borrow at 80% of the equity. Some lenders will limit the maximum amount you can borrow, regardless of your property value.
- You have enough equity in your property to get a line of credit. Most lenders require a Loan-To-Value Ratio (LVR) of 80% or less.
- You’ll need to demonstrate steady income and employment, as lenders will verify that you can afford to repay the line of credit.
- You can repay the line of credit before the end of the mortgage term.
- Home Equity Line Of Credit (HELOC): A revolving credit line secured against your home equity, offering lower rates than personal credit. The funds can be used for renovations, investments or major expenses.
- Personal Line Of Credit: An unsecured or secured credit facility for personal expenses like education, travel or emergencies. Interest rates are higher than on HELOCs, due to their unsecured nature.
- Business Line Of Credit: This type of credit provides businesses with flexible funding for cashflow, inventory or expansion. It can be secured or unsecured and offers ongoing access to capital without a fixed loan term.
- Overdraft Line Of Credit: This is attached to a bank account and allows withdrawals beyond the balance up to a set limit. It is often used for short-term cash shortages or unexpected expenses.
How Does A Line Of Credit Work?
When you take out a line-of-credit home loan, the lender will approve a credit limit based on your home equity. Then the ‘draw period’ begins. During the draw period, you can withdraw funds as needed, such as to pay a contractor for a kitchen remodel, without having to reapply for a new loan. You pay interest on only the amounts you’ve borrowed, typically at a variable rate and often interest-only. As you repay what you’ve borrowed, those funds become available for future use. After the draw period ends, however, you will need to start repaying the principal in addition to interest.
For example, if the current value of your property is $600,000 and you have $350,000 left to pay for it, you have equity of $250,000. If a lender’s borrowing limit is up to 80% of equity, you can borrow $200,000 through a line of credit. Let’s say you decide to use $50,000 for home renovations. You will be charged interest only on the $50,000. After drawing $50,000, the remaining available credit is $150,000.
As you repay the principal, the available credit replenishes, and you can borrow those funds again. The line of credit must be repaid by the end of the mortgage term.
What Are The Pros And Cons Of A Line Of Credit?
Pros
Cons
Who Can Qualify For A Line-Of-Credit Home Loan?
If you meet the following requirements, you can qualify for a line-of-credit home loan:
What Are The Types Of Lines Of Credit?
There are mainly four types of lines of credit in Australia. They are:
Contact us to explore your options for a line-of-credit home loan.
FAQs About Line-of-Credit Home Loan
Is It Better To Have A Credit Card Or A Line-Of-Credit Home Loan?
Credit cards are designed for everyday transactions, providing a revolving line of unsecured credit for purchases. They often come with rewards programs. A line-of-credit home loan, on the other hand, is secured by your home equity. It offers a larger credit limit at potentially lower interest rates and is suited for substantial expenses or investments.
Credit cards are easier to access for smaller, short-term borrowing. In contrast, a line-of-credit home loan involves a more complex application process and uses your home as collateral, requiring careful management to avoid risking your property.
What Makes A Line Of Credit Different From An Equity Loan?
Is It Better To Get A Personal Loan Or A Line Of Credit?
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