A line of credit, portfolio or home equity loan
What is a line of credit
A line of credit (sometimes called a home equity loan ) is a essentially a perpetual 'interest only' home loan secured by your home or other investment properties. Thus if you have a line of credit for $300,000 on which you owe $250,000, you pay interest only on the money you have borrowed (plus any administration costs the lender may impose). These facilities can be an integral part of a sound property investment finance structure but they aren't ideal for everyone so please get advice and don't hesitate to contact us to discuss your own plans and circumstances.
Portfolio loans are like 'Uber Lines of Credit" or equity loans on steroids. They are also often described as "Master Limits" and they form the basis of many very useful products. Typically a portfolio is based on an underlying line of credit account with the ability to have multiple splits into other accounts. These splits can be lines of credit, variable rate term loans, fixed rate loans, sometimes even introductory rate loans. The main difference between this and a typical professional package is that the loan limit is established and usually the splits can be switched, decreased or increased as required with the excess funds floating in the available master line of credit account. Remember that with a line of credit you only pay for what you use.
In some cases lines of credit do not require you to make regular payments so long as you remain within the credit limit - this is called capitalised interest. Instead, when interest is charged to your account it is added to the balance of your home loan. Thus for instance using the example above, if you need to pay $1,500 for interest on the $250,000 instead of being required to pay that amount into the loan, it simply becomes a loan of $251,500 which you pay back when you like. But of course if your credit limit is $300,000 and you're already borrowed to that limit, the lender is going to want to see some payments into your account to service the interest. The Australian Taxation Office currently has a draft ruling on Part IVA with what can only be described as incredibly wide interpretation on the deductibility of capitalised interest and the use of a line of credit to service investment debt. As a result of this we suggest that you seek urgent taxation advice if you currently use a line of credit to service investment property debt. The draft is supposed to be finalised on 7th March 2012
As you can see, a line of credit is one of the most convenient forms of credit. Its also more risky for people who don't keep a watch on their finances. If you have a line of credit, always keep track of how much you owe. It's a good idea to talk it over with your mortgage broker to ensure the line of credit is the best home loan product for your needs.
Note also that lines of credit are regarded by most lenders as premium products. They usually charge a higher interest rate on lines of credit. With a few exceptions this is even true within 'professional packages'. Contact us to find out which lenders will offer professional package type discounts on lines of credit. And if its hard for you to qualify for a professional package line of credit, we've set out some ways in which you can use cheaper products to give you the same results as a more expensive line of credit.
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