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Line of credit home loans, explained and analysed.

The benefits of line of credit loans

Do you want more financial freedom? Have you got equity in existing property? Would you like to consolidate your finances? A line of credit loan may give you access to funds to purchase another property, invest in shares or take a well-deserved holiday. 

What is a line of credit home loan?

A line of credit, otherwise known as an equity loan or a reverse mortgage, is generally an interest-only loan with no set date for the balance to be repaid by. It is one of the most flexible loans available and allows borrowers to withdraw funds from the equity in their property when needed. It is essentially an overdraft facility that is secured against your existing property, where interest is charged only on what you have used.

Most lenders permit you to make additional repayments, which you can redraw on as required, provided there is sufficient credit available.

How is it all calculated?

A line of credit loan will have a pre-approved credit limit that is usually much higher than that of a credit card. This is because you are a lower risk to banks as you are using the property as security against the loan.

If you have a line of credit for $100,000 but only need to withdraw $20,000 at first, you will be charged interest on the $20,000. If later down the line you take out an additional $50,000, you will pay interest on a total amount of $70,000.

Most financial institutions offer a line of credit loan, but to give you an idea of the features we have looked at Commonwealth Banks Viridian line of credit loan:

Viridian line of credit loan features

  • Six-month home seeker conditional pre-approval
  • Withdrawals anytime: Up to your agreed loan amount and daily card limit 
  • If you pay your interest, fees and charges monthly there are no set principal repayment requirements
  • Access to your equity to buy and expand your investment portfolio
  • Flexible loan amount: Access additional funds by increasing your loan amount
  • Take your loan to your next home (conditions apply)
  • Establishment fees and monthly charges apply

Do I need a line of credit loan?

A line of credit can serve many purposes for home owners who may need money in a flash. Whether you want to pay for renovations, purchase an investment property, fund retirement plans or pay off a personal debt – its purpose is purely up to the mortgagee.

The appeal of a line of credit loan is based on its accessibility and flexibility. The loan is much easier to obtain than other loan types or a credit card. The funds can also be withdrawn very easily and can be used for whatever purpose you need it to serve. You can also make extra repayments on the loan at any time, reducing interest over time.

A line of credit may not be suitable to pay off a personal debt for borrowers who may have poor financial discipline. Borrowers could lose equity, or even their property, if they cannot repay the loan.  

  • Higher credit limit than other loan types or a credit card.
  • Lower interest rates charged on the amount withdrawn compared to other loan types or credit cards.
  • Accessibility and flexibility.
  • Can be a way to reduce the total interest paid on a home loan over time.
  • Can be used for home renovations which increase the property’s value.
  • Higher interest home loan compared to other loan types.
  • Could lose equityor the property if you can’t repay the loan.
  • Not recommended for borrowers who have poor financial discipline.

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