What is a Line of Credit Home Loan?

Equity home loans might help you borrow money but you also need to weigh up the pros and cons, because they can come with risks.

There may be at least a few points in your life where you require a large sum of cash relatively quickly. Perhaps you have emergency medical expenses, or want to do a home renovation. Perhaps you want to utilize the equity in your own home as a deposit for an investment property. Whatever the reason, there will be times when borrowing money is inevitable. If you have a reasonable level of equity in your home, you may decide that a Line of Credit Home Loan is the best home loan for you – but you’ll need to be sure to stay on top of your finances.

What is a Line of Credit Home Loan?

A Line of Credit Home Loan (sometimes called a Revolving Mortgage) is an approved credit limit secured against the equity in your property. It has a variable (floating) interest rate and you pay interest on any amount of the loan that you draw down. You can draw down and repay the loan flexibly.

Compare Current Line of Credit Home Loan Interest Rates

How Do You Get a Line of Credit Home Loan?

Let’s say you originally borrowed $300,000 from a bank to buy a home, with a deposit of $50,000, at that point the equity in your home is $50,000. Ten years later, your debt is down to $170,000 and your property has increased in value to $450,000. This means that all up, you now have around $280,000 equity in your home. Provided you meet the lending criteria of the financial institution, you may then be able to take out a loan against a proportion of the equity you have.

Essentially, a Line of Credit Home Loan functions in a similar way to a credit card. You have a pre-approved credit limit and you can borrow as much of this sum as you want, with interest paid on the outstanding balance.

Home Equity Loans

Home Equity Loans: the Pros and Cons

A big advantage of a line of credit is that, due to the fact that you’re using your property as security against the loan, you present a lower risk to the lender and will generally pay a lower interest rate then you would on other forms of debt. Consider the following…

Current Home Loan Interest Rates

Table: Residential Home Loan Market – Snapshot of the current market (27/06/2016)
Floating 1 Year Fixed 2 Year Fixed 3 Year Fixed 4 Year Fixed 5 Year Fixed
Average 5.61% 4.51% 4.52% 4.68% 4.93% 5.06%
Min 5.45% 4.25% 4.15% 4.39% 4.59% 4.79%
Max 5.75% 4.85% 4.89% 4.99% 5.20% 5.30%
Source: www.canstar.co.nz, the search results do not include all home loan providers, and may not include all features relevant to you.

Current Credit Card Interest Rates

Table: Low Rate Credit Cards (27/06/2016)
Min Max Average
Purchase 5.69% 13.90% 12.30%
Cash Advance 12.69% 22.95% 20.06%
Balance Transfer 0.00% 8.95% 2.82%
Fee $   –  $65.00  $47.43
Source: www.canstar.co.nz, the search results do not include all home loan providers, and may not include all features relevant to you.

Because your home is being used as equity though, it does mean that if your investments go south, or you manage the loan poorly, you could lose your equity and struggle to repay the loan. If things are really dire, you may even lose your house.

Whether a line of credit loan is the best home loan option for you can also depend on what the debt is being put towards and what the other debt option would be. Using a line of credit loan to consolidate credit card debt, for example, could end up being an expensive option if you do not pay off the loan in a timely manner.

Compare Credit Cards with CANSTAR

Please put the case study below in a nice shaded box, with a thumbnail headshot

Line of Credit Home Loans: A Case Study

Louise has accumulated $10,000 of credit card debt and is deciding whether to refinance the debt onto a 5 year personal loan at 9% interest, or add it to her line of credit (LOC) home loan at 5.5% interest. Here is the potential difference in repayments over 5 years:

Debt Interest Rate Monthly repayment Repayment over 5 years
Personal Loan 9% $208 $12,455
LOC 5.50% $91 $11,461

Source: CANSTAR

In this situation, Louise would pay almost $1,000 less over the five year period by choosing a line of credit home loan. If, however, Louise was not disciplined about setting a timeframe for debt repayment (remembering that a line of credit can last indefinitely) and decided to pay the debt back via her line of credit over 10 years rather than five, her total repayment could potentially become as follows:

Debt Interest Rate Monthly repayment Repayment over 5 years
LOC 5.50% $109 $13,023

Source: CANSTAR

Discipline is Key with Line of Credit Home Loans

In other words, if using a line of credit for personal debt consolidation, discipline is the key!

In summary, while a line of credit home loan can be a good way to access your equity, if you’re not confident in your ability to manage your finances and stay on top of an additional loan, it may not be the best home loan option for you.

Compare Credit Cards with CANSTAR

 

Compare Home Loans with CANSTAR
Similar Topics:

Share this article