LINE OF CREDIT

A line of credit (LOC) is a type of loan drawn down using the equity in your home or investment property and repaid as the borrower chooses with interest being charged on the outstanding balance. It has the flexibility of a credit card without the typically high credit card interest rate and allows you to withdraw funds at any time up to a predetermined dollar amount (limit). A line of credit can be used (spent) as multiple smaller amounts or a larger lump sum and may be used to carry out renovations, pay bills, invest in property or shares. Some lines of credit allow the borrower to capitalise the interest, whereby interest repayments are added to the amount already drawn down, until you either reach the limit of the line of credit, or a set percentage of the limit. Lines of credit are interest only loans and the interest rate charged on the loan is usually more expensive than traditional Owner Occupied mortgage rates. Annual, half yearly or monthly fees are often charged on a line of credit and the credit limit is usually set as a percentage of the property’s value.

Upside

  • A line of credit offers flexibility with the ability to draw down funds up to your credit limit, as needed without having to seek approval from your lender.
  • Interest expenses on a line of credit “may” be tax deductible if the funds are used to purchase shares or property for the purpose of earning an income like dividends and rent.
  • Interest rates are often significantly lower than the rates charged on credit cards, car loans and unsecured loans.
  • Easy access to your funds as most line of credit facilities offer internet access, phone banking and cheque books.
  • Ability to consolidate your debts by paying them down using the line of credit.

Downside

  • The interest rate on a line of credit is usually higher than standard mortgage rates.<
  • A line of credit requires solid budgeting skills and discipline to ensure you stay within your financial limits.<
  • If you struggle to manage your credit cards, a line of credit is not something you should consider.<
  • If you don’t need access to the funds and flexibility a line of credit provides, don’t apply for one.<
  • Drawing down funds from a line of credit may increase the time it takes you to pay off you home loan.<
  • When a line of credit is secured against your home, your property is at risk in the event you fail to make the necessary repayments.