If you’re a homeowner, before you put that next big purchase on your credit card, you may want to consider a line of credit on your home loan.
A line of credit acts like an overdraft facility and gives you ready access to funds up to an approved amount. Once you have paid off what you have borrowed or have made extra repayments, you are able to redraw again from the line of credit.
This type of credit facility is best suited for large purchases, such as home renovations, holidays or to fund another property.
Essentially, it’s like a second loan on top of your home loan – without the hassle of applying for another source of credit – and you can access funds anytime, such as over the phone, on the Internet and also at ATMs.
Many providers charge the interest rate of your home loan. Because you’re using your home as collateral, lenders are able to give you these rates which are much more competitive than a credit card for instance.
This compares to the 10.75 percent interest rate for Bankwest’s Lite MasterCard, one of the lowest ongoing interest rates around.
Some providers will charge you several fees for a line of credit facility. For example, an application fee, a valuation fee for valuing your home, a monthly account keeping fee and a yearly ongoing fee.
The upside is many lenders do not charge transaction fees when you withdraw from your line of credit. Some providers, such as Aussie, will also allow you to make interest payments for up to 15 years.
How much can you borrow?
Some lenders will allow you to borrow up to 90 percent of your home’s value. There may also be a minimum amount you can borrow. For example, $15,000 at RAMS Home Loans.
But beware, a line of credit against your home loan won’t be suitable for everyone.
Variable interest rates mean minimum repayments may change from month-to-month, so if you like the stability of set repayments each month, this might not be for you.
But remember if interest rates drop and you maintain your current payment, you’ll pay off the line of credit quicker.
Ultimately, it will mean paying off your mortgage may take longer. Also, if you only pay off the interest incurred for the line of credit, it may lead you further into debt than you had anticipated.
For those who have trouble managing your finances and find it hard to resist buying because you have ‘funds’ available, the temptation of a ready supply of money may be too great.
To work out the best option for you, shop around and compare interest rates and fees between a revolving line of credit on your home and those of personal loans and credit cards. As always, read the terms and conditions and work out what’s best for you.