A Line of Credit home loan (also known as an Equity home loan) allows you to borrow back (up to a specified limit) against any equity built up in your property, using the property as security for the loan. They enable you to access quickly the equity in your property, which you can then use for making investments, property renovations and more.
Interest on a line of credit is charged only on the funds that have been used/drawn down. In effect, a Line of Credit home loan is like having a credit card with a super large limit, except that your property is used as security for the loan.
For example, you purchase a property for $500,000 inc all fees/duties using a $100,000 deposit and borrowing $400,000 - giving you initial equity of $100,000. Ten years later, your property is now worth $700,000, and you have reduced your home loan down to $250,000. You now have $450,000 equity in your property. Assuming you meet your lender's criteria, you decide to take out a line of credit home loan with a limit up to 80% (80% of $700,000 is $560,000) of the equity in your property. This means you borrow up to $310,000 ($560,000 - $250,000). You then use $25,000 of this line of credit loan to purchase shares; interest will only be charged on the amount drawn down - in this case, $25,000.
Line of Credit Home Loan Advantages
- Interest rates for Lines of Credit tend to be lower than credit cards or personal loans (but higher than other home loan types).
- If financially disciplined, the line of credit can give you the flexibility to invest your built up equity when required.
Line of Credit Home Loan Disadvantages
- Interest rates are generally a little higher than the standard variable rates.
- Requires discipline to ensure that your loan reduces over time.
- If used incorrectly, you can reduce the equity in your property.
- Like a credit card, lenders will view the Line of Credit as being fully drawn down when assessing you for new finance, which may then severely limit your borrowing capacity.
Most Suitable For
- Great for investors who like to have credit available should they need it.
- Anyone who may have erratic income.
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