A Line of Credit allows you to make the bulk of your purchases or payments through a credit card with an interest free period and benefit from the money you would of used in your offset account until the day you pay your credit card bill. These are typically set up alongside offset home loans as an additional feature.
Line of Credit Mortgages are one of the most flexible options you can raise money against your property
Another way of looking at a Line of Credit is as a flexible loan secured against a residential property, allowing access and repayment to funds whenever you want. These products are creative ways to raise funds for investment by providing cash up to a pre-arranged limit.
Beware of Line of Credit advances sold on the basis of benefiting from your salary payments
With Line of Credit Mortgages you use a credit card for most purchases allowing you to leave the bulk of your wage in the offset loan until your credit card account is payable. This slightly reduces the balance of the home loan debt for part of the month and therefore slightly reduces the interest payable. However, it’s worth noting the offset savings achieved for most people will be minimal. How quickly you can repay a loan usually depends to a far greater extent on your ability to make additional repayments, rather than through offset savings.
Consider if you really are going to make huge overpayments on your mortgage, if it’s not likely, why pay for an option you’re not going to use
However, some mortgage lenders only allow a Line of Credit as a way to obtain a further advance or offer it as a way to make overpayments on your mortgage. Since the interest rate you pay on a Line of Credit is typically higher than your main mortgage rate, unless you are able to make very large repayments a Line of Credit can be a costly option.
Generally, borrowers who cannot afford to make significant additional repayments will be worse off refinancing to a line of credit, because a Line of Credit will usually have a higher interest rate outweighing any offset savings.
The sad fact is most lenders only allow you to take further advances through a line of Credit advance, ask your mortgage broker to consider re-mortgaging your whole loan rather than go for the easy option for further advances.
Beware of mortgage lender illustrations with assumptions skewed in their favour, a Line of Credit home loan is a big earner for these institutions. The biggest misdirection used to confuse you is “assuming you overpay with a large amount or a lump sum at the start of each year”. Ask to see an illustration without any overpayments to fully understand the cost of this feature if you don’t overpay.
Charts and graphs may be misleading if the lender suggests that the balance you owe is going down more quickly because of some special feature of that loan when in reality its just because you are paying larger amounts off each month.
Line of Credit mortgages are generally interest only loans with no set term for the loan to be repaid. The borrower then has the freedom to choose when they will make payments on the principal, which may suit some borrowers.
Lines of Credit can be particularly useful for people who have fluctuating incomes and may sometimes be able to make additional payments, but may also need to draw down additional funds or be unable to meet the normal repayments on a standard loan.
They suit people who need a great deal of flexibility and can afford to pay a higher rate of interest.
The risks in Line of Credit Mortgages primarily lie in the temptation to overspend and never pay back your home loan. Many mortgages are set up with an additional facility to draw down equity on your Line of Credit up to a maximum limit and its easy to draw down funds when money is running low.
If you think it will be hard not to dip into your Line of Credit for daily living, then a Line of Credit is not for you. You may reach the end of your mortgage term and still face a large debt.