Line of Credit – LOC
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 an ongoing ‘interest only’ loan facility secured by your home or other investment properties. But unlike most home loans where the lone is fully drawn down on settlement, a line of credit has a set credit limit but starts with a zero balance. You can then draw down funds or repay funds as and when you like. As long as you stay under the loan limit you have free access and you only pay interest on the loan balance. 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 a broker 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. If you are capitalising interest you should seek urgent tax advice to ensure that your are not headed for a show down with the ATO
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 so it important that you 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 your broker 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.