A line of credit home loan (also known as a home equity loan) gives you pre-approval to access home loan funds anytime up to a certain value. The policies of different lenders vary, but most will be prepared to approve a home equity loan limit of up to 80% of the value of your home.
Some lenders will be prepared to lend more, but it’s important to understand that they’ll usually charge a higher interest rate and require you to take out lenders’ mortgage insurance (LMI). The LMI would protect the lender if you defaulted on your repayments. The cost of LMI varies, but it can be more than $10,000 on an average-sized mortgage.
How do line of credit home loans work?
Line of credit home loans have a maximum credit limit (like a credit card limit, except at a much lower interest rate). They allow you to access the equity (ownership) that you build up in your home over time.
There are two ways you can can build up up your home equity:
1) by making your regular home loan repayments (and potentially additional ones) to
reduce how much you owe.
2) by your home increasing in value over time.
For example, imagine you take out a home loan of $400,000 and ten years later you owe $300,000. If the market value of your property is $760,000, you have equity of $460,000 (i.e. $760,000 less $300,000).
A line of credit home loan would allow you to borrow against that $460,000 equity up to your pre-approved limit. If that pre-approved limit is 80%, you could borrow up to $368,000 without needing to go through a new application process.
You would only be charged interest on how much you actually borrow, not on your full line of credit (unless you borrow up to the maximum limit).
What are the advantages and disadvantages of line of credit home loans?
Line of credit home loans have both pros and cons.
Pros of line of credit home loans
- They allow you to borrow funds at a lower interest rate than other types of loans (e.g. personal loans). This is because of the loan security that your home provided to the lender.
- They can be great if you need to access funds quickly, because your credit limit is pre-approved.
Cons of line of credit home loans
- If you use the line of credit, you increase your level of debt.
- If you use your line of credit, you reduce the amount of equity in your home.
What should you use a line of credit loan for?
Ideally, you should use a line of credit loan to invest in assets that will increase in value over time (e.g. for a home renovation or a deposit on an investment property).
You shouldn’t use a line of credit loan to invest in assets that will decrease in value (e.g. for a car) or for expenses (e.g. a holiday).
How we can help
At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to find the right loan for your needs, including line of credit home loans. We can also help you with your application.
Contact us today for an obligation-free chat! We’ll take the time to understand your individual needs before providing you with appropriate advice. Our focus will be on finding the right loan for your needs from over 60 Australian lenders.
And best of all, our service is free!