What is a line of credit loan?
A line of credit home loan can be used in a similar way to a credit card. It allows you to borrow funds for home renovations, purchasing property, or even non-investment expenses like new cars and holidays, using existing equity in your home.
On monthly basis, your total mortgage is reduced by depositing money into the account, while being increased by withdrawing from the account.
Advantages of a line of credit home loan
This type of loan is best suited to people who want flexibility in their loan and can commit to regularly contributing funds to the account. It usually has a lower interest rate than credit cards and personal loans, so can be a more cost-effective way of accessing funds. It also allows you to make extra repayments without penalties.
It can be a good option for owners of investment properties to use as a tool for investment buffers and assisting with property cash flows.
To make sure the line of credit account gets regular inbound payments, it can be wise to set up your salary so that your income gets paid directly into the loan.
Disadvantages of line of credit loans
Line of credit loans usually have higher interest rates than fixed or variable mortgages because of the transactional nature of the facility.
You will also need to be disciplined – if you start accessing available cash for things that don’t provide a return, your debt won’t be reduced effectively and things can get out of control.
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