LINE OF CREDIT LOAN ADVICE FOR AUSTRALIAN BORROWERS
Information, money saving tips and commentary on Line of Credit Loans in Australia

Revolving Line of Credit Loan



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What is a Line of Credit?

A Line of Credit allows you to use the equity you have built up in your home as collateral for further credit and is characterised by flexibility and ease of use. It operates similar to a credit card and is the equivalent of an overdraft facility.

Property prices all over Australia have surged by more than 50% in recent years giving existing home-owners substantial equity to use for securing a loan - Equity is the difference between what you owe on your home loan and what the property is actually worth (according to the bank!).

The amount of Credit that is available to you depends on the amount of equity you have in your home and your ability to make repayments. Typically you can borrow up to 80% of your home value (or 90% with Lenders Mortgage Insurance) provided you have the financial resources to service the debt.

Line of Credit loans are commonly used to finance a deposit on an investment property, to renovate and increase the value of the existing home, or to purchase expensive items like a car or boat.

Line of Credit funds which are used to invest in assets that appreciate in value can increase your wealth, but inversely can result in greater debt when applied to items that depreciate or have no residual value like cars, boats, spa's, holidays etc.


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Features of Line of Credit Loans

The Line of Credit is essentially a second loan (or overdraft facility) that is secured against your home, so you will get 2 loan statements each month. It is also possible to break the Line of Credit into sub-accounts. This enables you to keep accurate records for taxation purposes.

With the Line of Credit type of loan, it is possible to only pay interest on the part of the loan you have drawn down on unlike a conventional loan where you pay interest and principal on a lump sum. However if you wish to reduce the loan you obviously need to make principal repayments as well. The interest rate is usually similar to a standard Variable Rate loan.

The Line of Credit is not suitable for borrowers who don't have good financial management skills. If you can't control and repay more than the required monthly payment on your Credit Card then this type of loan is NOT for you! Too many Australians end up bankrupt, and for this reason lenders are tightening up eligibility criteria.

Some of the features that give a typical Line of Credit Equity Loan its flexibility include -
  • maximum amount is usually 80% of valuation
  • minimum amount is usually about $20,000
  • redraw up to your approved limit
  • can be used for any purpose
  • extra repayments allowed
  • funds can be accessed by most withdrawal methods
  • permanent loan facility
  • loan can be split into multiple accounts to simplify accounting for tax purposes
  • flexible repayments - only interest has to be paid monthly

Benefits of a Line of Credit

  • Interest can be reduced by paying wages, tax refunds, investment income etc into account and leaving as much of this money in the account as you can each month to reduce the balance.
  • Draw down funds as required rather than as one lump
  • The redraw facilty means you have easy access to extra funds if required.
  • Increasing your repayments above the agreed amount can shorten the term of the loan and save thousands of dollars in interest.
  • You can vary loan repayments to suit your cash flow. Monthly interest payments are compulsory and principal voluntary.
  • You may never have to apply for another loan

Tips and strategies

  • Try to obtain a Line of Credit that is portable so that you can transfer it between properties if necessary, especially if you are a property invester
  • The best Lines of Credit can be split for dual purposes, eg personal and investment (for tax purposes)
  • Avoid loans with monthly account fees
  • Making weekly or fortnightly repayments pays your loan off faster than monthly payments because you are making 1 or 2 extra repayments per year
  • When interest rates drop retain current repayment levels
  • Have your wages paid into your loan account to reduce interest and use the interest free period on a credit card for purchases before paying the credit card bill from the loan account. Often you will be offered a Credit Card at the time you apply for your Home Equity Loan.
  • Put lump sum payments like tax refunds into your loan account for as long as possible. If required later, use the redraw facility.

Example Rates and Fees

Variable Rate Home Loan NO FEES (June 2016):
  • Monthly fee NIL
  • Annual fee $150
  • Redraw fee NIL
  • Extra Payment fee NIL
  • Fixing fee NIL
Low Rate 5.65% std. variable
CCR 5.67%*
*Based on $250,000 Loan over 25 years.

You can apply over the Internet and ask a for a free no-obligation quote on a Line of Credit.

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