Tell a friendDefinition
A line of credit is similar to a big credit card, except it is an evergreen Interest only facility, so that you do not have to repay the principle during the life of the loan. If you take out a line of credit, you can draw on any available funds up to your maximum limit at any time. You can then repay, borrow again whenever you want, up to the limit without needing to re-apply for credit.
Interest Only Terms (duration) and Special Provisions
Lines of credit mortgages have usually have a maximum term of 25 years. The Loan to Valuation Ratio (LVR) is also more limited and you will generally need a 20% deposit for a line of credit.
Advantages
Lines of credit inherit the advantage associated with an interest only repayment option. As the repayment is lower, it increases the amount of short term disposable cash you have after making your monthly loan repayment.
Another advantage is you have ready access to your equity which can make them a simple replacement for a construction loan. Other people that are likely to take out a line of credit mortgage include investors such as share traders and business owners that need regular and fast access to credit.
Disadvantages
As with the advantages, a line of credit also inherits the disadvantages of interest only mortgages. In addition, you will require a larger equity stake which may restrict your borrowing capacity. Another disadvantage of this type of facility is it often includes an annual review clause and lenders may choose to terminate your facility before the full term has expired.
Beware of
Debt reduction spruikers and mortgage brokers or lending consultants that suggest a line of credit will help you repay your mortgage off in a much shorter period of time. There are a range of interest saving products such as offset facilities that will usually achieve the same or better outcome at a lower cost. As this type of mortgage delays the repayment of the principle, both lenders and mortgage brokers alike make more money than they do on a principle and interest loan with offset facilities.
Pricing
Line of credit mortgages can attract a rate loading of around 0.05% for some lenders.
Popularity
Popularity of line of credit mortgages in Australia is inflated by misrepresentation of the benefits of the line of credit by debt reduction spruikers and their friends.
A line of credit may also be known as an equity line of credit, revolving line of credit, equity access, line of credit line, home equity loans, and an all-in-one home loan.
