What is a line of credit? And how do they work?
A line of credit home loan can give you access to a pre-approved level of credit whenever you need it. This might be helpful if you are planning on renovating your home or looking to buy an investment property, although it’s also important to be aware of the risks and potential costs involved.
A line of credit home loan allows customers to borrow money using the equity in their home.
Similar to a credit card, you have a pre-approved limit on a line of credit loan, and you can flexibly use the loan up to that limit without having to apply each time you want to borrow money. In other words, it is a revolving credit facility that you can use to invest, renovate, or use as a rainy-day buffer, for example.
Generally speaking, with a line of credit:
You can draw funds up to your approved limit whenever you need.
You only pay interest on what you’ve used of your available credit. For example, if you had a $100,000 line of credit and you drew down $50,000, you would only be charged interest on that $50,000. This interest would generally be added to the loan each month.
You can typically make interest-only repayments or let the interest be added to your home loan balance (capitalised) up to your approved line of credit limit. Capitalising interest does mean that you will reach your approved limit sooner, compared to making interest-only repayments. You’re also usually free to make as many repayments as you like.
If your lender allows it, you may want to set up the line of credit so that your salary is paid directly into the loan, and you pay your bills, make credit card repayments (if applicable) and withdraw money directly from the loan itself.
This way, a line of credit can work both as your bank account and your loan, with your savings going towards paying off the loan faster.