Line of Credit or Equity Home Loans



A line of credit is a essentially a perpetual 'interest only' home loan secured by your home or other investment properties. Thus if you have a line of credit for $300,000 on which you owe $250,000, you pay interest only on the money you have borrowed (plus any administration costs the lender may impose). These facilities can be an integral part of a sound property investment finance structure.

Often lines of credit do not require you to make regular payments so long as you remain within the credit limit - this is called capitalised interest. Instead, when interest is charged to your account it is added to the balance of your home loan. Thus for instance using the example above, if you need to pay $1,500 for interest on the $250,000 instead of being required to pay that amount into the loan, it simply becomes a loan of $251,500 which you pay back when you like. But of course if your credit limit is $300,000 and you're already borrowed to that limit, the lender is going to want to see some payments into your account to service the interest.

As you can see, a line of credit is one of the most convenient forms of credit. Its also more risky for people who don't keep a watch on their finances. If you have a line of credit, always keep track of how much you owe.

Essentially, line of credit home loans give you a credit facility secured on your home loan. An agreed limit will be set, and funds can be accessed up to that limit at any time.

Using a credit card, you are able to withdraw funds from your mortgage as you need them, either for day to day expenses or for other investments such as a second home. You can choose to make repayments either in full or on a monthly basis.

Advantages:

• Funds are easily accessed via a credit card or cheque book
• Credit limits are typically higher than credit cards
• A lower interest rate than most credit cards
• Offer flexibility in funding other projects such as home renovations and holidays
• Other debts can be consolidated into the loan thereby giving you more control over your finances


Considerations:

• With funds so easy to access, borrowers must be
disciplined in their spending, as all loans have to be
repaid eventually
• Some line of credit loans come with extra fees and
charges
• Falling behind on repayments can result in you loosing
your home


Is a line of credit loan suitable for you?

Line of credit loans offer a great opportunity to home owners wishing to access extra funds for other projects. If you have a home loan and wish to use your property as security against a new loan, then you can look at line of credit as a potential strategy.