Line of Credit Home Loan

A line of credit home loan lets you withdraw money from your equity to spend on renovations, investments, a holiday or anything 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?

$
years
Name Product Interest Rate (p.a.) Comp. Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
ANZ Equity Manager
6.01%
600 (waived)
$150 p.a.
80%
$901.19
Access your equity with a low variable rate and low fees.
Bank First Equity Line of Credit
4.49%
$300
$300 p.a.
80%
$760.14
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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.
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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 creditPersonal loan
Borrowing amount$10,000$10,000
Length5 years5 years
Rate5%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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23 Responses

    Default Gravatar
    ChrisApril 11, 2018

    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.

      Avatarfinder Customer Care
      JoshuaApril 12, 2018Staff

      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

    Default Gravatar
    RavApril 6, 2017

    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

      Avatarfinder Customer Care
      HaroldApril 7, 2017Staff

      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

    Default Gravatar
    ShelleyMarch 13, 2017

    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?

      Avatarfinder Customer Care
      HaroldMay 5, 2017Staff

      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

    Default Gravatar
    roslynMay 20, 2016

    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?

      Avatarfinder Customer Care
      MarcMay 23, 2016Staff

      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

    Default Gravatar
    IvanaApril 27, 2016

    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.

      Default Gravatar
      BelindaApril 28, 2016

      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

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