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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Hi
My home is valued at approx. $650K
I currently have around $30K to pay off
I have a current like of current of $59K
I am looking to purchase a investment property
I am employed full time
How much can I borrow
Hi Rav,
Thank you for your inquiry.
It woul be nice getting in touch with a licensed mortgage broker so that you can review your borrowing capacity. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.
Moreover, I’m afraid we can’t really tell you how much you can borrow because we are not a lender and the answer would depend on your whole financial situation. Thankfully, you can check our borrowing power calculator to get an idea how much you can borrow.
I hope this information has helped.
Cheers,
Harold
I have a 50,000 home loan / line of credit. When I was notified by the bank that the loan was switching from interest only to monthly principal + interest and this would equal 440 / month, I paid 48,500 dollars off the loan in order to reduce my principal. The bank has continued to charge me 440 per month, vent though my loan balance is now $1500. Is this legal? They say that I have the ability to use the 48,500, so I need to pay $440 a month for this privilege. What?
Hi Shelley,
Thank you for your inquiry.
With your current situation you would need to read your loan docs or get a financial advisor/accountant or mortgage broker to read them to help understand how the bank is able to do this.
I hope this information has helped.
Cheers,
Harold
My home is worth $3 million. I want a line of credit of $900,000 to buy a property. I own my home how do I do this and how much are repayments?
Hi Roslyn,
Thanks for the question.
You can compare and apply for line of credit loans using the table on this page. Select the ‘Go to site’ buttons to be taken to the lender’s site and discuss your options and start the process. Alternatively, you can start speaking to a mortgage broker by selecting the ‘Speak to a mortgage broker’ tab and filling out the form.
Your repayments will depend on how much you withdraw and how you choose to use them.
You can use our calculator to get an idea of what your repayments would be.
I hope this helps,
Marc
Hi
I was looking at getting line of credit against my home.
I own my own home , value about $850,000 and I have no mortgage
I don’t have any debt, I have substantial money saved , I have full time job.
I am looking at buying some investment property , when I contacted one of the lenders, I was only given $300,000
I thought I was able to get more like the 80% value of my home.
Hi Ivana,
Thanks for reaching out.
If you’d like to understand your borrowing capacity, you can use our borrowing power calculator, which takes into account your income, liabilities, and the number of dependents that you have.
Keep in mind that lenders have different eligibility criteria for different loans and this criteria can be more stringent for line of credit (LOC) and investment loans (particularly after APRA’s intervention).
I recommend getting in touch with a licensed mortgage broker, so that you can review your borrowing capacity and your propensity to repay a loan. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.
All the best,
Belinda
Hi I am on a carer pension and my husband is on aged pension. We own our home outright, of low value due to situation approx $80-100k and have $40k+ savings.
We need some renovations a new bathroon toilet built on as the current one is not suitable etc not sure ob costs but say $40000.
Is a LOC the way to look for finance?
Hi Rob,
Thanks for reaching out.
While I can’t provide personalised advice, if you need to fund a renovation project, then a line of credit home loan or a personal loan may be feasible.
You can compare a range of line of credit or home equity loans above on this page, and you can compare personal loans too.
Keep in mind that with a line of credit loan, you generally need to have the good financial discipline to ensure that you won’t access a large number of funds at one given time.
It’s advised that you speak to a broker to discuss your borrowing options and the type of finance that will suit your situation. A broker can review your borrowing power and they can draw upon a panel of lenders to find one that’s more likely to review your application (given that you are both receiving pension benefits).
All the best,
Belinda