A line of credit (or a home equity loan) allows you to borrow money using the equity in your property.
Equity is the value of your home minus any money you owe on it. If your home is worth $700,000 and you owe $400,000 on your mortgage, then your equity is $300,000. Using a home equity loan, you can access some of that money (up to 80% of the property's total value) to spend on anything you want.
But are there any limits or guidelines about how you spend the money? And are there any risks?
When you access money through a line of credit, it means you are withdrawing money from your home loan based on the amount of equity you have built up in the home. The equity in your home is the amount of property you own, which is based on the property value minus the amount of debt you have left.
You can take out a line of credit and spend it on anything you like, from home renovations, a holiday or car, to even funding another property purchase or investment.
Note: The property value is based on the current value, not the value when you bought it. So, if your property value has increased since you purchased it, you have even more equity to access!
Most lenders will lend you up to 80% of your property's value. Some will go up to 90% or even 95%, but an 80% limit is far more common.
So, assuming you're going to a lender that offers 80% of your property's value, you can work out how much equity you could borrow using this formula:
(Property value x 80% LVR) - existing debt.
Example:
The amount you would access through your line of credit = $160,000
You only need to repay the amount you actually spend, not the total line of credit that the lender extends to you.
If you have a $200,000 line of credit and you spent $30,000 on a car, you would only pay interest on the $30,000, not the full $200,000.
Investors can use their equity to buy an investment property. For example, if your property is worth $500,000 and your mortgage balance is $200,000, then you have $300,000 worth of equity. This is a substantial amount of money that can be used to fund the purchase of another property or invest in other assets, such as shares.
There are a few potential costs of a line of credit loan:
With many line of credit home loans, you don't have to make monthly or regular repayments. This gives you more flexibility. In many cases, you don't have to make repayments until you reach your credit limit.
Line of credit home loans are often interest only for the first few years, meaning you pay the interest charges now and repay the borrowed amount later.
This keeps your costs down, but if you continue doing this for a long time it could cost you a lot in interest.
There are many benefits to withdrawing your equity if you need it, but any borrowing situation comes with risks that you need to know.
Comparing home equity loans is a little different to comparing traditional mortgages. You need to look at:
If you're interested in applying for a line of credit equity loan, it's important to speak to your lender or mortgage broker. While you can get a line of credit from your existing home loan lender, you may be better off refinancing to a new one. Get an idea of what your existing has to offer and then compare with the lenders in the above table.
When you're applying for a line of credit you may need to satisfy the following criteria or supply the following information:
You can save money on the interest payable over the life of your loan by using your income to offset the loan amount. This can be done by depositing your income into the loan account and then withdrawing money as needed to satisfy your living expenses from the line of credit. With this method, the interest on the loan is only calculated on the remaining balance of the account, which will lower your interest charges.
From a lender's point of view, it has the security of your home in the event you default on the loan. If your property declines in value, you will end up with less equity and you could even end up owing more on the loan than your home is actually worth. This is why it's a good idea not to borrow or use the full amount of equity available. Always leave a buffer.
Line of credit loans typically have much lower interest rates than personal loans. If you're disciplined in paying off your line of credit, you could potentially save thousands of dollars in interest. Let's look at an example.
| Line of credit | Personal loan | |
|---|---|---|
| Borrowing amount | $10,000 | $10,000 |
| Length | 5 years | 5 years |
| Rate | 5% | 14% |
| Monthly repayment | $188.71 | $235 |
Over the course of the personal loan, you would pay $4,117 in interest. With a line of credit rate, you'd pay $1,322.74 in interest. That's a saving of more than $2,794 over 5 years.
However, this requires the discipline to repay your line of credit loan in a timely manner. If you ended up letting your line of credit loan stay open for 15 years, you would end up paying $4,234.29 in interest, eclipsing the amount you would have paid on a personal loan.
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I currently own my home with no mortgage and it’s worth about $650,000. My only income is a disability pension from Centrelink. I want to buy another property before I sell my property. Would I qualify for a loan in order to purchase the new property?
Hi David,
This depends on a range of things, but one of the main factors that banks and lenders consider is your income and savings and your ability to support the loan. Your best bet might be to speak to a mortgage broker who can help review your situation and see what options you have. Their services are free.
I have unit paid off with 350k in equity but have a bad credit score as I was denied a 30k personal loan I already have an existing 30k loan I’m paying but desperately need $$ for some home renovations but having trouble finding a lender
You could focus on improving your credit score although this takes a few months at least. Talking to a mortgage broker might be a good idea as they can help you find a suitable lender, if you’re eligible.
My father is ninety five owns his home no mortgage I am living with him at the moment caring for him. I would like to build a granny flat under my house could he get a line of credit on his house to do this
When granny flat is finished we would sell his house the value of his house is $600,000
Thanks
Sue
Hi Sue,
It could be possible to do this, although a lender would still need to see how you can repay the money you’ll borrow. And a lender may have some restrictions around lending for renovations.
I suggest talking to a mortgage broker. They can help you navigate more complex loan scenarios like this.
Kind regards,
Richard
Is a line of credit still offered as a product to personal banking customers? I can only find one with CBA and RAMS.
Hi Hels,
If you’re looking for a line of credit personal loan, we have a guide here with a few lenders that offer the product.
If you want more information on line of credit home loans, you might want to speak to your existing lender or mortgage broker for more information on your specific circumstance.
Thanks,
Rebecca
I own my house that
We own our house and want to take out a line of credit for 100k and our house is valued at 850k
I am a sole operator of a small business that only turns over around 20-30k, my question is if my low income isn’t enough to meet the application credentials can I use a guarantor for this type of loan?
Regards
Chris.
Hi Chris,
Thanks for getting in touch with Finder.
The answer to your question is yes. It is possible to use a guarantor for a line of credit loan. However, it would still depend on your chosen lender whether they accept such arrangements or not. Your house is already good collateral for your loan and so, lenders might still consider your application even if you don’t have a guarantor. There are lenders offering secured personal loan options that allow you to use your home equity as a guarantee that you might want to consider. But of course, having a guarantor can increase approval especially if the guarantor has a good credit score and financial standing.
For this reason, I highly recommend that you get in touch with your chosen lender and determine whether they accept a guarantor or not. Here’s our list of guarantor personal loans if you’d like to compare your options. You can use our comparison table to help you find the lender that suits you. When you are ready, you may then click on the “Go to site” button and you will be redirected to the lender’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. You can also contact the provider if you have specific questions.
I hope this helps. Should you have further questions, please don’t hesitate to reach out again.
Have a wonderful day!
Cheers,
Joshua