There may be a few times in your life when you require a large sum of cash relatively quickly. Perhaps you have emergency medical expenses, or want to do a home renovation. Or maybe you want to utilise 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 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 you owe.
You can draw down (take out money) or make repayments as frequently as you like, and interest is calculated on a daily basis. Generally, a line of credit facility is set up for a period of between one to five years – this may automatically renew at the end of the period, or you may need to request a renewal.
How does a line of credit home loan work?
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. In general, having a good credit history can help you qualify for a lower interest rate.
How much can you borrow?
The amount you’ll be able to borrow will depend on your personal finances and your financial institution’s lending criteria. However, it will be largely dependent on the equity you have in your home.
For example, let’s say you originally borrow $300,000 from a bank to buy a home, with a deposit of $50,000 – giving you equity in your home of $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 the equity in your home will have risen to $280,000. You then may be able to take out a loan against a proportion of your $280,000 equity.
Line of credit home loans: the pros
- Compared to increasing the size of your fixed-term mortgage, a line of credit home loan gives you the flexibility to pay off the loan amount faster, and without penalty
- Allows you to borrow money against the equity in your home at rates often lower than those attached to personal loans or credit cards
- Gives you the ability to reduce your interest payments by parking sums of money you’re not using at any time – for example, money set aside to pay provisional tax commitments – in your line of credit account
- Can be suitable for those with irregular income streams, such as the self-employed, or investors who regularly need access to large sums
- The flexibility of accessing/paying back cash as required is useful when paying for work such as home renovations, when timeframes and costs are not precise
- Although not a recommended practice in the long term, you need only to pay off the interest on the loan
Line of credit home loans: the cons
- Floating interest rates are generally higher than those associated with fixed-rate mortgages
- Requires discipline and commitment on the part of the borrower to ensure the loan is paid off as early as possible
- Bank fees, withdrawals, deposits and other charges can apply to the line of credit account
- Your home is at risk if you fail to make repayments on the loan
To compare the current line of credit home loans available in the market with Canstar, just click on the button below:
About the author of this page
This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.
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