How Does A Line Of Credit Work?

A line of credit is like having a very large secured credit card. It will generally be set up over a normal home loan term (eg. 30 years) with the line of credit option in place for one-to-five years, or revolving that is, occurring for longer periods.

You generally only pay interest on the portion of the loan that is drawn down. Some home loans will renew the line of credit after a set period, whereas others will require you to begin making payments on the principal after a set period of time. The interest rate on a line of credit is generally variable.

A line of credit is a revolving credit feature also known as an equity loan, which allows you to access the equity in your property to create additional wealth through investment, complete capital improvements or free up cash for other purposes.

Your line of credit loan is secured by a residential property. It enables you to withdraw funds up to a set limit at any time. Generally a line of credit is an interest only loan, and in some cases you may be able to capitalise the interest payments. Interest rates are usually higher than for a standard variable home loan.

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Who will a line of credit suit?

Lines of credit facilities may suit borrowers with fluctuating incomes, investors, those looking to renovate their property or anyone who requires a great deal of flexibility. However, good discipline and budgeting is required in order to reduce the loan size over time.