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Line of Credit Home Loans
A line of credit loan lets you withdraw money from your equity to spend on renos, a party, investments or anything else your heart desires. But what are the risks?
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A line of credit (or a home equity 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. If your home is worth $500,000 and you owe $200,000 on your mortgage, then your equity is $300,000. Using a home equity loan, you can access some of that money (up to 80% of the property's total value) to spend on anything you want.
But are there any limits or guidelines about how you spend the money? And are there any risks?
Looking for a loan or need more information?
What is a line of credit and how can I use it?
When you access money through a line of credit, it means you are withdrawing money from your home loan based on the amount of equity you have built up in the loan.
You can take out a line of credit and spend it on anything you like, from home renovations to a holiday to a car, or even to fund another property purchase or investment.
How much of my equity can I borrow?
Most lenders will lend you up to 80% of your property's value. Some will go up to 90% or even 95%, but an 80% limit is far more common. Using our example of a $500,000 loan with a $200,000 loan balance, this means you can borrow to up to 80% of the property's value.
- $500,000 x 80% = $400,000
- $400,000 - existing debt of $200,000 = $200,000
- Amount you can access through your line of credit = $200,000
Interest rate calculation
You only need to repay the amount you actually spend, not the total line of credit that the lender extends to you.
If you have a $200,000 line of credit and you spent $30,000 on a car, you would only pay interest on the $30,000, not the full $200,000.
How to use a line of credit loan to invest
Investors can buy an investment property by borrowing equity in an existing property. For example, if your property is worth $500,000 and your mortgage balance is $200,000, then you have $300,000 worth of equity. This is a substantial amount of money that can be used to fund the purchase of another property or invest in other assets, such as shares.
How much does a line of credit home loan cost?
Here's a breakdown of the potential costs of a line of credit loan:
- Interest charges. The lender charges interest, but remember this is only charged on the amount you spend, not on the total credit limit.
- Upfront fees. Many lenders charge an application fee. A valuation fee is quite common too. You may also have to pay a discharge fee when the loan ends.
- Ongoing fees. Some lenders charge a small monthly service fee instead of, or sometimes in addition to, the application fee.
Repayments
With many line of credit home loans, you don't have to make monthly or regular repayments. This gives you more flexibility. In many cases, you don't have to make repayments until you reach your credit limit.
Line of credit home loans are often interest only for the first few years, meaning you pay the interest charges now and repay the borrowed amount later.
This keeps your costs down, but if you continue doing this for a long time it could cost you a lot in interest.
The benefits and drawbacks of borrowing home equity
There are many benefits to withdrawing your equity if you need it, but any borrowing situation comes with risks that you need to know.
Benefits
- Accessibility. Line of credit loans are easier to obtain than other types of loans and credit cards.
- Flexibility. The funds can be withdrawn easily via cheque or an 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.
Drawbacks
- 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.
- Equity loss. Your equity is wealth. It's yours to use as you see fit, but keep in mind that by using it, you're reducing – hopefully temporarily – the value you have in your house.
- No end date. The flexibility of a line of credit can be a bad thing too. If you take a long time to repay what you've borrowed it could get expensive.
How to compare and apply for a line of credit
Comparing home equity loans is a little different to comparing traditional mortgages. You need to look at:
- Interest rate. The lower your rate the lower your repayments.
- Fees. The fewer the fees, the better.
- Borrowing amount. The amount you wish to borrow is an important consideration. Some lenders have fairly low maximum loan amounts, while others could lend you enormous sums of money (provided that you have the equity).
How do I apply for a line of credit equity loan?
If you're applying for a line of credit you may need to satisfy the following criteria or supply the following information:
- Name and address for each borrower
- Purchase date and price of your home
- Employment income
- Outstanding balance and monthly payment on current mortgage
- Estimated market value of your home
- Requested loan amount
- Photo ID for all borrowers
More line of credit questions
How can I minimise the interest I have to pay?
You can save money on the interest payable over the life of your 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 as needed to satisfy your living expenses from the line of credit. With this method, the interest on the loan is only calculated on the remaining balance of the account, which will lower your interest charges.
How can I protect my home?
From a lender's point of view, it has the security of your home in the event you default on the loan. If your property declines in value, you will end up with less equity and you could even end up owing more on the loan than your home is actually worth. This is why it's a good idea not to borrow or use the full amount of equity available. Always leave a buffer.
How does a line of credit loan compare to a personal loan?
Line of credit loans typically have much lower interest rates than personal loans. If you're disciplined in paying off your line of credit, you could potentially save thousands of dollars in interest. Let's look at an example.
| Line of credit | Personal loan | |
|---|---|---|
| Borrowing amount | $10,000 | $10,000 |
| Length | 5 years | 5 years |
| Rate | 5% | 14% |
| Monthly repayment | $188.71 | $235 |
Over the course of the personal loan, you would pay $4,117 in interest. With a line of credit rate, you'd pay $1,322.74 in interest. That's a saving of more than $2,794 over 5 years.
However, this requires the discipline to repay your line of credit loan in a timely manner. If you ended up letting your line of credit loan stay open for 15 years, you would end up paying $4,234.29 in interest, eclipsing the amount you would have paid on a personal loan.
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Important Information*Ask an Expert
I own my house that
We own our house and want to take out a line of credit for 100k and our house is valued at 850k
I am a sole operator of a small business that only turns over around 20-30k, my question is if my low income isn’t enough to meet the application credentials can I use a guarantor for this type of loan?
Regards
Chris.
Hi Chris,
Thanks for getting in touch with Finder.
The answer to your question is yes. It is possible to use a guarantor for a line of credit loan. However, it would still depend on your chosen lender whether they accept such arrangements or not. Your house is already good collateral for your loan and so, lenders might still consider your application even if you don’t have a guarantor. There are lenders offering secured personal loan options that allow you to use your home equity as a guarantee that you might want to consider. But of course, having a guarantor can increase approval especially if the guarantor has a good credit score and financial standing.
For this reason, I highly recommend that you get in touch with your chosen lender and determine whether they accept a guarantor or not. Here’s our list of guarantor personal loans if you’d like to compare your options. You can use our comparison table to help you find the lender that suits you. When you are ready, you may then click on the “Go to site” button and you will be redirected to the lender’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. You can also contact the provider if you have specific questions.
I hope this helps. Should you have further questions, please don’t hesitate to reach out again.
Have a wonderful day!
Cheers,
Joshua
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.
MOreover, I’m afraid we can’t really tell you how much you can borrow because we are not a lender and the answer would depend on your whole financial situation. Thankfully, you can check our borrowing power calculator to get an idea how much you can borrow.
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 the table on this page. Select the ‘Go to site’ buttons to be taken to the lender’s site and discuss your options and start the process. Alternatively, you can start speaking to a mortgage broker by selecting 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 them.
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 borrowing power 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.
While I can’t provide personalised advice, 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 too.
Keep in mind that with a line of credit loan, you generally need to have the 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 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 this guide – What happens to my home loan if I die?
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 exposure 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