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Learn more about lines of credit, and compare interest rates, fees, features and benefits to work out which options could help you access the equity in your home.

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What is a line of credit loan?

A line of credit (LOC) is a type of loan where rather than borrowing a lump sum to repay in instalments over time, you can borrow and repay smaller sums as you choose, up to a maximum limit. This maximum limit is often based on the value of an asset you use as collateral to secure the loan.

A home equity line of credit (HELOC) uses the value of a property as security for your loan. The maximum credit limit may be based on your equity in the property – the value of the home minus the outstanding mortgage.

How does a line of credit loan work?

Borrowers who have built up some equity in their home, but are looking for some extra financial flexibility, may be interested in a line of credit loan.

A line of credit works similarly to a credit card, where you have the flexibility to borrow and repay money up to a certain credit limit. This limit is typically based on the equity in your home, though you may only be able to access a limited percentage of this equity.  

For example, imagine you previously bought a $500,000 home, and currently have $200,000 equity in the property, with $300,000 still owing on the mortgage.

If you applied for a line of credit for 80 per cent of your equity, you’d be able to borrow up to $160,000 at maximum from your credit account.

You may be able to access money from your line of credit by writing cheques, or by using a debit card.

What are the features of a line of credit loan?

The key features of the line of credit loan are:

  • During the life of the loan you can withdraw money as you need it, without having to notify the lender about what the funds are being used for each time you withdraw.
  • You can access the loan to borrow money repeatedly, so long as you make enough repayments to keep the total amount you’ve borrowed under the maximum credit limit.  
  • You’re only charged interest on how much you’ve currently borrowed, rather than on your maximum credit limit.
  • You can pay back any amount as long as you make the minimum monthly payments set by the lender. Minimum monthly repayments may be a combination of interest and principal, or interest only.
  • The interest rate is usually higher than the standard variable rate charged by banks and financial institutions on home loans, but below the typical interest rate charged on personal loans or credit cards.

How does a line of credit loan differ from a personal loan?

The line of credit loan is different to a standard personal loan, where you borrow a lump sum that you’ll repay with interest over a fixed loan term. A line of credit instead allows you to borrow and repay money as you choose, and only pay interest on what you’ve currently borrowed.

Personal loans may be available with variable or fixed interest rates, with fixed rate allowing you to budget for consistent and regular repayments. Lines of credit are more likely to charge variable rates of interest, so it’s possible that the amount of interest you're charged could change in time.

While secured personal loans are available (for example, many car loans) unsecured personal loans are also an option. Lines of credit that are secured against you home equity are more likely to have lower interest rates than many personal loans.

Keep in mind that line of credit personal loans also exist, and also function much like a credit card with a higher than average credit limit. However, because a line of credit home loan is secured by your home equity, it will typically have a higher credit limit and lower interest rate than a line of credit personal loan.

How does a line of credit loan differ from a credit card?

Lines of credit typically function similarly to credit cards, allowing you to borrow and repay money when you choose. However, because credit cards are typically unsecured, a line of credit will often have a lower interest rate and higher credit limit.

This is why some borrowers choose to opt for a line of credit, rather than simply increasing their existing credit card limit or applying for a second credit card.

What can I use a line of credit loan for?

Lines of credit are often used for:

  • Home renovations and repairs
  • Buying another property
  • Taking a holiday
  • Buying a car

For example, you may have equity in your home and are considering a series of repairs and minor alterations.

If you don’t have a firm idea of how much money you will need in your renovation budget, opening a line of credit can give you the flexibility to pursue your project, knowing you can draw down funds to cover the costs of each job, making repayments as you go.

Being smart about your line of credit loan

Financial discipline and organisation will help you manage your debt on a line of credit loan. There are several simple ways you can utilise its features to your full advantage:

  • One common way of reducing the cost of the loan is to have your income deposited into your line of credit loan account instead of your bank account, to offset the overall loan amount. That way, the interest on the loan is only calculated on the remaining balance of the account, lowering your overall interest charges. You can then use the line of credit to help manage your everyday cash flow.
  • Any extra income you receive, such as a tax refund, can also be deposited into the account as an additional repayment, contributing to reducing the interest payable.
  • Consider making a regular repayment of more than the minimum required amount a part of your monthly or fortnightly budget. This could help to offset some of your financial risk if you spend more than you planned with your line of credit.
  • If property prices in your area are not increasing, try to be careful about your spending with your line of credit, in case your home’s value won’t be enough to cover everything you’ve borrowed if you end up in a tight spot and need to sell or refinance.

What should I be aware of with line of credit loans?

  • Line of credit home loans typically have higher interest rates than those of home loans offered by most banks and mortgage lenders.
  • Just like with a credit card, it’s tempting to only make the minimum repayments on a line of credit, until more interest charges have built up than you can comfortably afford to repay. Regular repayments that gradually reduce what you owe can make a big difference.
  • Most lines of credit require you to have a good credit rating to apply. Before you submit any applications, check your credit score and find out if you can do anything to improve it and meet the eligibility criteria.
  • The better your credit history, the greater the likelihood of being offered a lower interest rate.
    As with a standard variable loan, the interest rate on a line of credit loan is vulnerable to overall market movements. Ensure you have a realistic financial buffer in place in case of interest rate rises.
  • Some lenders  charge monthly or annual fees on their line of credit, as well as upfront application fees, valuation fees and discharge fees. You’ll need to factor all of these costs into your financial calculations when comparing line of credit loans from a range of different lenders.
  • As with more traditional secured loans, if a line of credit loan isn't repaid according to the terms of the contract, the lender may be able to seize your property in order to recoup the debt.
  • A line of credit loan isn't the only way to access equity in a property. A redraw facility or offset account can also be used to access money from your home loan, though these features work differently and may not suit every borrower.

Who offers line of credit loans?

Banks, credit unions and other financial institutions in Australia offer lines of credit, which can offer a valuable way to manage your finances when you require some flexibility as you work towards your goals.

This includes major banks like the Big Four (ANZ, Commonwealth Bank, NAB and Westpac) as well as smaller specialist lenders and mutual banks (e.g. QBANK, Heritage Bank, Greater Bank, Beyond Bank etc.).

Comparing line of credit loans can help you work out which option may best suit your financial situation, both now and in the future. If you need help, consider contacting a mortgage broker for advice.

How do I get a line of credit?

  1. Compare line of credit loans, and consider which ones may suit your financial needs and personal goals.
  2. Consider a valuation. Assessing the current value of your property could give you a better idea of how much equity may be available to you. The lender will likely conduct a valuation as part of your application, but you can also order a free property report to make your own estimate beforehand.
  3. Collect your documents. Like applying for a home loan, you’ll likely need to provide proof of your identity, proof of regular income (e.g. payslips), proof of savings (e.g. bank statements), and a list of your assets and liabilities. Some lenders may also have other requirements.
  4. Contact the lender who provides your preferred line of credit product. If you’re not already a customer, you may need to create an account first.

You can also apply for a line of credit by contacting a mortgage broker. These home loan experts can help you work out it a line of credit is the best option for you, and walk you through every step of the comparison and application process.

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, target market determination fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.