Take advantage of the existing equity in your home to finance a renovation or property purchase with a line of credit loan
Whether you need to access your existing equity to finance a renovation, property purchase or even to fund your 'bucket list' retirement plans, a line of credit or equity loan can help you realise your personal and financial goals.
As your property increases in value, the difference between the amount you owe on your mortgage and the amount your property is worth is called equity.
Normally you can access the current equity in your home when you sell the asset because the sale price goes to pay off any outstanding amount you owe on your loan, and anything that's left over represents your profit in equity.
With a line of credit or line of equity loan, you can access that extra value earlier to further secure your financial position.
What is a line of credit home loan?
A line of credit loan allows you to borrow money using the equity in your property.
Equity is the value of your home minus any money you owe on it. For example, if your home is worth $500,000 and you still owe $200,000 on it, then you have a total of $300,000 in equity.
A line of credit acts as a flexible transactional mortgage that allows you to access your funds when you need them. You can use the funds for a renovation, to purchase a property or car, or even to cover your 'big' retirement plans.
Line of credit home loan comparison
Rates last updated July 23rd, 2017.
Jodie
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A brief comparison of line of credit loans
| Equity Loan | Interest Rate (p.a.) |
|---|---|
| NAB Portfolio Facility (LOC) - $250,000 to $499,999 | 5.86% |
| State Custodians Low Rate LOC - LVR 80% to 90% (Owner Occupier) | 3.79% |
| NAB Portfolio Facility (LOC) - $500,000 to $999,999 | 5.76% |
| IMB Platinum Package - Equity Line Advantage (Owner Occupier) | 4.99% |
What is a line of credit home loan?
A line of credit, also called an 'LOC' or home equity loan, is a revolving line of credit with a variable rate that offers increased flexibility for the borrower. This type of loan allows the borrower to choose how often and how much to borrow against the equity in the house. The lender sets the initial limit to the credit line using similar criteria to a regular home loan. While a line of credit usually carries a shorter term than a mortgage, some are available for up to 30 years.
Unlike a regular loan that provides the borrower with one lump sum payment that must be repaid over a specific timeframe, a line of credit allows the borrower to access the funds as they are needed, and the money doesn't have to be used all at once. The repayment amount is dependent upon the amount of money that the borrower withdrew from the available credit balance, and in most cases only the interest needs to be paid back.
How is interest calculated?
A line of credit loan allows you to take out an approved amount of your equity which you can use separately for different purposes or all at once. The way in which you decide to use the funds determines how much interest you pay.
For instance, if you have a line of credit for $150,000 but you decide to only use $80,000 for a home renovation then you will only pay interest on the $80,000 and the remaining $70,000 remains untouched. If you then decided to use another $50,000 for a holiday, then you would pay interest on a total amount of $130,000 with the outstanding $20,000 to use further down the track.
Some lenders will allow you to capitalise the interest until you either reach the limit of your line of credit loan or you reach a certain percentage of the limit.
Should I take out a line of credit?
Most lenders offer a line of credit to people that can demonstrate financial discipline. This can be shown by having good credit history and a stable income. Since the borrower can access the money whenever they want, it is tempting to take it out all at once, which is not the best option. The ideal recipient of a line of credit loan is someone that can resist the temptation to use up the loan money on frivolous things.
Rod's line of credit
Rod's property is worth $300,000 and he originally borrowed 80% LVR (loan-to-value ratio) with a $240,000 loan. As he repays the loan over time, he can access any existing equity that is available.
This means that when the loan balance is reduced to $180,000, Rod could potentially access $60,000 in equity as this would represent the total amount that he has paid off.
As Rod is a disciplined borrower, he believes that a line of credit loan will enable him to fund his retirement travel plans.
How does a line of credit loan work?
When purchasing a home, most people put a deposit on the property and then take out a loan for the remainder of the property value. This means that most people start out with at least a small amount of equity in their home - normally 10-20%. In an ideal situation, the property's value will increase over time, and with regular mortgage payments the equity in the house will increase.
A line of credit loan provides you with a line of credit to access the equity you have in the property. In most situations, the credit limit is set at 80% of the value of the property.
The borrower can access the money at any time, without having to apply for it. The borrower can take out as much or as little money as they choose, as long as the amount doesn't exceed the limit.
Once money has been drawn down from the line of credit loan, it does not have to be repaid right away. Repayments are only required when the loan limit has been reached. If a borrower decides to make repayments, it can be added to the line of credit. For example, if a borrower takes $10,000 from their line of credit and they pay back $100 a month, the repayment can be drawn from the line of credit so that the amount drawn down is now $10,100.
What are the costs?
Some lenders charge monthly or annual fees on a line of credit equity loan. The average fee for a line of credit is around $700 a year. This fee can be charged monthly, in six-month increments, or on an annual basis.
While it will differ from lender to lender, some banks will charge other fees such as an application fee, valuation fee and discharge fees.
How can I minimise the interest payable?
You can save money on the interest payable over the life of the loan by using your income to offset the loan amount. This can be done by depositing your income into the loan account and then withdrawing money needed to satisfy living expenses from the line of credit as needed. With this method, the interest on the loan is only calculated on the remaining balance of the account, which will lower your interest charges.
Back to topWhat can I use a line of credit loan for?
A homeowner can use the money in a line of credit equity loan for anything. The funds can be accessed to go on holiday, to renovate or make repairs on the property, to pay bills or to buy a new car. There is no need to submit an application to the lender to notify them what the money will be used for. Simply withdraw the money from the account.
A line of credit equity loan includes features which:
Allow you a line of credit up to the value of the equity in your home
Your lender will define the value of the equity in your home, so this may cost you a valuation fee to activate your line of credit home loan. Your credit limit will usually be set at around 80% of the value of your property.
Access to funds at any time without making an application to your lender
A line of credit allows you to access the funds with your linked transaction accounts or using internet banking at any time for any amount you choose.
No regular repayments are required until you reach your limit
Your repayments can be added to your line of credit, so for example if you have drawn down $10,000 and your repayment is $100 a month your repayment can be drawn from your line of credit so the amount drawn down becomes $10,100.
Monthly or annual fees
There can be fees associated with a line of credit home loan which may be charged monthly, six monthly or as an annual fee. On average a fee for a line of credit will be several hundred dollars a year.
You can save on interest using your income to offset the loan amount
You can have all of your income deposited into your loan account and then draw your living expenses from your line of credit as you require them. The interest on your loan is then only calculated on the remaining balance of your account saving you interest charges.
While there are risks and costs associated with a line of credit loan, there are a range of benefits to being able to draw on the equity in your loan when needed.
Cheap credit
A home loan is a cheap form of credit because the interest rate is much lower than that on credit cards or personal loans and even on some margin loans.
Avoid fees for additional repayments or redraws
While a standard loan may allow you to deposit more into your loan account and then redraw when you need it, there are often fees associated with additional repayments and redraw facilities however with a line of credit loan you can access your equity amount for a set annual fee.
You can use the money for whatever you choose
This means you can withdraw money from your line of credit equity loan to pay your bills, renovate, go on holiday or buy a new car and you don't need to make an application to the bank to show them what you are using the money for. All you do is withdraw the money.
Increase your net worth by using a line of credit for investments
If you use the equity in your home to make investments which offer a good return and strong growth rate, you can by increasing your net worth as you use your money wisely to accumulate more appreciating assets.
If you have the financial discipline to manage your spending using a line of credit equity loan, you can leverage the equity you have accumulated in your home to strengthen your financial position and secure your financial future.
How to use a line of credit loan to invest
As investors are often looking for ways to build their wealth, a line of credit loan may represent a good opportunity for investors. For example, if your property is worth $400,000 and you've taken out a mortgage of $250,000, then you have $150,000 worth of equity. This is a substantial amount of money that can be used to fund the purchase of another property if you're looking to diversify your portfolio.
What are the features of a line of credit loan?
There are many features of a line of credit loan that make this type of loan distinct from other loan types.
- Structure. The most obvious feature of a line of credit loan is its structure. This type of loan allows people to use money from a credit limit as needed and it works similar to a credit card. A borrower could be approved for a $100,000 credit limit, but only use $75,000 of it. The repayment amount is based on the $75,000 that was borrowed, which needs to be repaid over the term of the loan. At any time, the borrower can access additional money from the line of credit loan, as long as the total amount withdrawn does not exceed the $100,000 credit limit at any given time.
- Interest is only due on withdrawn amounts. Another unique feature of line of credit loans is that borrowers only have to pay interest on the amount of money that was used, not on the total amount of the available credit. This means that borrowers are not charged interest on unused money. It's a good incentive for people to only use as much money as they need and to avoid withdrawing extra money simply because it's available.
- Credit limit. The credit limit of a line of credit loan is dependent upon the property value. This is different than with other loans, which are usually dependent upon the equity of a house, the borrower's credit history, and their income. The more a person's property is worth, the higher their credit limit will be.
- Flexible use of funds. The final feature of a line of credit loan is that the money can be used for a variety of purposes. The funds can be used for home renovations, the down payment on an investment property, to purchase or refinance a vehicle, to go on holiday, or to pay for a college education.
Pros and cons of a line of credit loan
There are many reasons why some would be interested in obtaining a line of credit home loan, however there are advantages and disadvantages that must be considered.
Advantages
- Accessible. Lines of credit loans are easier to obtain than other types of loans and credit cards.
- Purpose variety. The line of credit loan can be used for a variety of purposes (e.g. home renovations, property purchase, holiday)
- Flexibility. The funds can be withdrawn easily via cheque or ATM card linked to the loan. Some lenders provide borrowers with the ability to withdraw funds through an online banking system or a telephone banking system.
- Additional repayments. Extra repayments on the loan can be made at any time which can help reduce the amount of interest paid over the life of the loan.
- Low-interest rates. One of the most attractive benefits of a line of credit loan is that it often has lower interest rates compared to other products such as personal loans or credit cards.
Disadvantages
- Higher interest. The interest rate is usually higher for a line of credit loan compared to a traditional variable rate loan.
- Difficult to manage. As it's easy to access the money, and most line of credit loans involve a large amount of money, the borrower needs to be financially disciplined to manage this type of loan.
- Security. If the loan isn't repaid according to the terms of the contract, the lender can take the property as payment.
How can I protect my home?
From a lender's point of view, they have the security of your home in the event that you default on the loan. To avoid the lender taking possession of your asset in the event that your unable to meet your repayments, you should ensure that you do not borrow against equity that has been calculated on an inflated price of your home's value.
If your property depreciates in value, you will end up with less equity. When house values drop, the borrower will find out that they now owe more on the loan than what the home is actually worth.
This is why it can be a good idea not to borrow or use the full amount of equity that is available. Always leave a buffer.
Line of credit loan tips
There is a lot to think about when considering a home loan, no matter what kind of loan you'd like to get and what you intend to use the funds for. Here are some tips to keep in mind:
- Consider minimising the amount of interest payable on your loan by offsetting it with your income.
- Don't withdraw more funds than you need.
- Compare a range of line of credit loans to ensure your getting a competitive deal.
Should I take out a line of credit loan?
If you're thinking of taking out a line of credit loan, you should consider whether:
- You have the discipline to stick to a budget
- You have not borrowed against equity that has been calculated on an inflated price
- You have the restraint to not use all the funds at once
- You have a cash buffer to protect yourself from rising interest rates
How can I apply for a line of credit home loan?
If your applying for a line of credit you may need to satisfy the following criteria or supply the following information:
- Applicants must be at least 18 years old
- Name and address for each borrower
- Purchase date and price of the home
- Employment income
- Income from any other sources
- Outstanding balance on the current mortgage(s)
- The monthly payment on the current mortgage(s)
- Estimated market value of the home
- Requested loan amount
- Photo ID for all borrowers
- Previous address, if at current address for less than two years
- Previous employer, if with current employer less than two years
Hi
My home is valued at approx. $650K
I currently have around $30K to pay off
I have a current like of current of $59K
I am looking to purchase a investment property
I am employed full time
How much can I borrow
Hi Rav,
Thank you for your inquiry.
It woul be nice getting in touch with a licensed mortgage broker so that you can review your borrowing capacity. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application. On this page you can click the tab “Speak to a Mortgage Broker”.
I hope this information has helped.
Cheers,
Harold
I have a 50,000 home loan / line of credit. When I was notified by the bank that the loan was switching from interest only to monthly principal + interest and this would equal 440 / month, I paid 48,500 dollars off the loan in order to reduce my principal. The bank has continued to charge me 440 per month, vent though my loan balance is now $1500. Is this legal? They say that I have the ability to use the 48,500, so I need to pay $440 a month for this privilege. What?
Hi Shelley,
Thank you for your inquiry.
With your current situation you would need to read your loan docs or get a financial advisor/accountant or mortgage broker to read them to help understand how the bank is able to do this.
I hope this information has helped.
Cheers,
Harold
My home is worth $3 million. I want a line of credit of $900,000 to buy a property. I own my home how do I do this and how much are repayments?
Hi Roslyn,
thanks for the question.
You can compare and apply for line of credit loans using this table. Click the green ‘go to site’ buttons to be taken to the lender’s site to discuss your options and start the process. Alternatively you can start speak to a mortgage broker by clicking the ‘Speak to a mortgage broker’ tab and filling out the form.
Your repayments will depend on how much you withdraw and how you choose to use it.
You can use our calculator to get an idea of what your repayments would be.
I hope this helps,
Marc.
Hi
I was looking at getting line of credit against my home.
I own my own home , value about $850,000 and I have no mortgage
I don’t have any debt, I have substantial money saved , I have full time job.
I am looking at buying some investment property , when I contacted one of the lenders, I was only given $300,000
I thought I was able to get more like the 80% value of my home.
Hi Ivana,
Thanks for reaching out.
If you’d like to understand your borrowing capacity, you can use our calculator which takes into account your income, liabilities and the number of dependents that you have. Keep in mind that lenders have different eligibility criteria for different loans and this criteria can be more stringent for line of credit (LOC) and investment loans (particularly after APRA’s intervention).
I recommend getting in touch with a licensed mortgage broker so that you can review your borrowing capacity and your propensity to repay a loan. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.
All the best,
Belinda
Hi I am on a carer pension and my husband is on aged pension. We own our home outright, of low value due to situation approx $80-100k and have $40k+ savings.
We need some renovations a new bathroon toilet built on as the current one is not suitable etc not sure ob costs but say $40000.
Is a LOC the way to look for finance?
Hi Rob,
Thanks for reaching out.
As finder.com.au is an online comparison website we are not licensed to give you personal advice regarding the type of finance that you should apply for. However, if you need to fund a renovation project, then a line of credit home loan or a personal loan may be feasible.
You can compare a range of line of credit or home equity loans above on this page, and you can compare personal loans on this page.
Keep in mind that with a line of credit loan, you generally need to have good financial discipline to ensure that you won’t access a large amount of funds at one given time.
It’s advised that you speak to a broker to discuss your borrowing options and the type of finance that will suit your situation. A broker can review your borrowing power and they can draw upon a panel of lenders to find one that’s more likely to review your application (given that you are both receiving pension benefits).
All the best,
Belinda
I’m currently semi retired, working part time and together with my allocated pensions and annuities my annual income is approx $60,000. I own my home which has a market value of #850,000. All credit cards both bank and store are paid in full each month. We own two cars. We currently have a Line of credit with the NAB which has a ceiling of $30,000.The LOC debt outstanding is approx $7500. The interest rate is 5.36%. We have no other debts. I’m seeking to increase the LOC ceiling to $50,000 and improve on the 5.36% interest rate. What advice can you offer?
Hi John,
Thanks for your question.
There are number of products on this page that is under the 5.36% p.a. mark. If you click on interest rate (p.a.) in the blue comparison table above, it will automatically sort the products into ascending order for you.
If you’d like to proceed with the new loan, you can speak to your new lender about what options you have paying out your current LOC.
I hope this helps,
Shirley
I’m looking at a 120,000 line of credit, have no mortage, house value 1.2Mil. I will draw down small amounts Buy car , hol etc, extra money into super over a 2 year period. We plan to sell the house 2018 pay off the Line of credit. I know you pay for what you use (interest) how does the lender determine what the Monhtly re-payments will be ???
Hi Greg,
Thanks for your question.
The monthly repayments are usually determined by the interest rate, applied to the outstanding balance. You can enter your borrowing amount into our blue table above, and it will generate the monthly repayments for you.
Cheers,
Shirley
my husband has a line of credit it is attached to an investment property, what happens if he dies, does it automatically come to me or does the line of credit become a mortgage?
Hi Sue,
Thanks for your question.
We have a good article called ‘what happens to my home loan if i die?’ that can provide more information on this topic. Generally the debt is handed over to the person is closest to the borrower. As the article explains, there are some measures that you can take.
Hope this helps,
Shirley
Hi Sue-anne,
thanks for the question.
We interviewed an expert from Slater & Gordon about this and wrote a guide about it.
I hope this helps,
Marc.
I have about $280 000 equity in my home and I would like to apply for a line of credit. I have no other loans apart from my mortgage and I have few expenses (only storage and health insurance). I don’t own a care and I have no dependents. I applied for a loan of $5000 from the bank with which I have my mortgage but they refused. The reason is that I am currently unemployed at the moment, but I have signed a contract to start a well paying job in December this year.
My question is: Can I apply at another bank even if I don’t have a bank account with them? I don’t even have a credit card because I am financially conservative, but when I applied for one at a different bank to my mortgage bank, I was refused again, because I am currently unemployed. If I can’t manage to get an equity line of credit from a bank, what are other options for me to get $5000 in the next month or so? I would really appreciate your advice.
Hi Justine,
Thanks for your question.
Currently being unemployed is a huge roadblock for any type of credit application, because most lenders like to see that you’re earning an income to pay back the loan you take out. Even though you intend to tap into your equity, lenders like to see that there is a supplementary income to reduce the risk exposed to them.
If you’d still like a line of credit home loan, you may want to get in touch with a mortgage broker. They’re home loan experts who can help you find the right loan for your situation.
Hope this helps,
Shirley
Ihave equity in my investment property which is currently tenanted.
The property is free of mortgage and I wish to take up a line of credit for $100,000
Please advice on interest rate
N. Jayram
Hello Jayram,
thanks for the question.
This will depend on the lender, so you may wish to compare the line of credit equity loans on offer and then enquire directly with the lender about what rates may apply to you.
I hope this helps,
Marc.