Updated: Aug 4, 2021
With a line of credit loan, you use a single account for your home loan and your everyday spending.
The limit on the line of credit loan is fixed and does not reduce as you repay the loan. This means you can always draw up to this limit.
You can make everyday purchases directly from the loan. You may also use a credit card with an interest-free period that is automatically paid by the line of credit loan.
Your wage and other money stay in the loan account and your credit card is paid off each month from this. The money in your account reduces how much you owe on the loan for part of the month and therefore the interest you will pay.
Unless you are a careful budgeter, you could end up spending more each month than you pay off on your loan and never reduce the loan balance. So instead of saving money, it will cost you more.
Be aware that, if you take out this type of loan with someone else, either person can take out money on the loan (up to the credit limit)without the consent of the other person, unless you specify when you set up the account that both signatures are required for withdrawals.
In a falling house price market, you face a greater risk that you will end up owing more than your house is worth. The faster you pay off your loan, the more likely it is that you will owe less than your house is worth (this is called having equity).
With a line of credit loan, you need to be disciplined about reducing your loan balance, because repayments that reduce the balance are usually not required.
Speak to your mortgage broker today about line of credit loans.
The Newstead Group Team