What is a Line of Credit Home Loan in Australia (2024 Guide)

what is a line of credit home loan

A line of credit loan in Australia lets you use built-up equity in your home to borrow money. 

This financing option might be suitable for borrowers who need extra cash to pay bills, renovate their homes or invest in property or the stock market. 

In this article, we will answer some of the most important questions regarding these loans, including ‘what is a line of credit home loan and how it works, ‘how to apply for one and ‘what are the biggest risks involved. 

Let’s get started. 

What Is a Line of Credit and How Does It Work?

As mentioned above, a line of credit home loan allows you to use the equity in your home to borrow money

Put simply, a line of credit home loan is a revolving loan facility that you can take out as a lump sum or in smaller amounts over a certain period of time. 

It works similarly to a credit card or an overdraft account, which means that you will have a pre-approved credit limit and you can use funds up to that limit without having to reapply for a loan every time you need to borrow money. 

How do you make repayments on a line of credit loan in Australia?

Unlike personal loans, lines of credit don’t require monthly repayments, which makes them one of the most flexible financing options out there. 

In fact, you don’t need to repay anything until you’ve reached your credit limit, although you will still have to repay the loan at the end of term.

A line of credit loan in Australia should be repaid within 30 years.

The good news is that you are allowed to make as many repayments as you want during that time. Doing so will reduce the amount you have to pay back at the end of term and help you avoid paying off a huge sum at once.  

Note: Some lenders may offer an evergreen line of credit loan that lasts forever. These, though, are very rare and getting approved is almost impossible. 

Line of Credit and Interest Rates

With a home loan line of credit, you actually only pay interest on the amount you withdraw from your available credit. For example, if you have $200,000 through your line of credit and you take out $80,000 to pay for renovations, you will only be charged interest on the $80,000.

Line of credit home loans are usually interest-only for the first few years. While this allows for more flexibility as you only pay interest on what you withdraw from the loan, it might cost you more in the long run since line of credit home loans have higher interest rates than standard mortgages. 

Interests can be capitalised, which might help you avoid the biggest trap of a LOC loan—getting stuck with repaying the principal after the loan term is over. This way every dollar you put in the account goes towards reducing the principal amount borrowed, but it also means that you will reach your credit limit faster. 

Line of Credit Home Loan: What Else Do You Need to Know?

Here are the answers to some of the most common questions and issues regarding a line of credit loan in Australia. 

How much can you borrow with a line of credit loan?

When applying for a line of credit loan in Australia, you will typically get 80% of your property value. Some lenders could go up to 90 or 95%, although this is quite rare. 

So if your property is worth $500,000  and your home loan is $200,000, you could access up to $200,000 through your line of credit. 

Note: Not all lenders use the same criteria when determining how much you can borrow, so make sure you research several home loan providers and the conditions they offer. You could also talk to a financial advisor who will tell you exactly how much line of credit loan you could get given your financial situation. 

How can you access a line of credit loan?

Once your loan is approved, the money will be accessible to you either

  • Through a debit card
  • Online account which you can use to transfer the money to your regular bank account.

If your lender agrees you could set up the line of credit in a way that your salary is paid directly into the loan. This way the line of credit home loan will function as a bank account from which you can withdraw cash when needed. Plus your savings will go into it as well, helping you make regular repayments and reducing the amount you have to pay back at the end of the term.

What is a line of credit good for?

The money you get in a line of credit loan can be used for anything you want, from ongoing expenses, like bills, to investing in the stock market. You could also use the money to carry out home renovations, pay for holidays, buy a new car, or just save it for a rainy day.

On top of that, you can also use it if you are on a tight budget. It’s a good replacement for a credit card as you pay less on interest. (more below on the difference between a credit card and a line of credit home loan).

Note: if you are doing large renovations in your home, especially if you are planning on demolishing the existing structure and rebuilding, you should apply for a construction loan. 

A line of credit is best suited for: 

  • Potential investors who want to have money saved up to use when a good opportunity presents itself. 
  • Business owners who need extra funds at certain times to cover period of lower cash flow.
  • Borrowers who have several big expenses around the same time, such as paying for their children’s education, or purchasing a car. A line of credit loan will save them the trouble of applying for a new personal loan for each of these expenses. 

How much does a line of credit home loan cost?

Besides interest rates, there are some other fees that come with a line of credit home loans. Whether you are switching lenders or extending the mortgage package with the same provider, you might be required to pay an upfront application fee. Line of credit loans also come with higher annual fees than the standard mortgage. 

You could also be required to pay:

  • A valuation fee when you apply
  • A discharge fee when the loan ends. 

Some lenders charge a small monthly service fee as well. 

How to Apply for a Line of Credit Home Loan

Applying for a line of credit loan is relatively straightforward and not that different from applying for any other kind of loan. 

In addition to the standard identification papers, you might also be required to show payslips and statements for your current mortgage. Some lenders might also ask for proof of what you need the funds for and how you plan to use them or a financial plan detailing how you plan on repaying the loan at the end of term. 

Lenders will most likely run credit score and serviceability assessments (a good credit score will increase your borrowing power), mostly to ensure that the loan will meet your requirements. 

Note: Not all mortgage providers offer a LOC. Your lender will inform you if this option is available, however, to get independent financial advice, it’s best to speak to a mortgage broker. 

What Is the Difference Between a Loan and a Line of Credit? 

Personal loans and lines of credit may seem very similar, but there are a few notable differences between the two. 

Interest rates 

Not only do line of credit home loans come with higher interest rates, but they also have variable interest rates. This means that your interest rate will change over time and you cannot predict how much more or less in interest you will have to pay. 

Personal loans, on the other hand, have lower fixed interest rates, which are determined during the application process. Fixed rates are a much better option, especially when you have to plan your budget for monthly loan repayments.

Repayments 

A line of credit loan is interest-only, which means you don’t have to repay the loan each month. Personal loans don’t allow for so much flexibility. There is a required minimum principal and interest rate repayments attached to your personal loan that you have to pay off every month. 

Loan term

In addition, personal loans have a set loan term of one to seven years in which the money must be repaid in full, while a line of credit loan stays open until you reach your credit limit. 

Extra fees

Both types of loans require the payment of standard fees, although some LOCs may come with annual service fees, in addition to the monthly service and application fees you pay on personal loans. 

To sum up, personal loans are better suited to people who want to borrow less money, say up to $20,000. In fact, the average personal loan amount in Australia is $15,000 to $16,000. If you need more than that, then a line of credit would be a better choice. 

Line of Credit Home Loan vs Credit Cards 

A home loan line of credit works in the same way as credit cards. That said, there are differences between these two financial products.

If you already have equity built up in your home, then a line of credit loan would be a much better idea. However, if you need money for some minor expenses, then a credit card would be a better choice. 

Pros and Cons of Line of Credit Home Loans

A line of credit loan can be a great financing option when you need extra cash. But is it the best choice for you? What are the benefits and the risks involved in getting a LOC?

Pros of a line of credit home loans

The main advantages include: 

  1. A line of credit home loan is incredibly flexible as it allows you to access the funds whenever you want
  2. No need for monthly repayments—another thing that makes these loans super flexible.
  3. You can use the money for anything from investments in tech company stocks to paying electricity bills.
  4. You only pay interest on the amount you use from the available credit.
  5. You can withdraw as much as you want up to your credit limit without applying for a new loan.
  6. You can make monthly repayments if you choose to, or you won’t have to make monthly payments at all unless you go over the credit limit.

What are the disadvantages of a home equity line of credit?

Here are some of the biggest downsides to a line of credit loan:

  1. You will pay higher interest than standard home loans.
  2. Lenders have stricter criteria when approving a LOC.
  3. Making interest-only repayments can add up costs over time. 
  4. If you can’t repay the loan, you might lose your home.
  5. Line of credit home loans are not offered by all lenders.

The biggest drawback to a line of credit loan is the flexibility in making repayments. Since you don’t have to pay back the loan each month, you might forget that interest is being charged leading to debt that is hard to manage. 

You will still have to repay the entire loan at the end of term, as well. So if you don’t have a clear strategy on how to do that, you will find yourself in serious financial trouble. 

Did you know that 37% of Aussies have a hard time repaying their debts?

Alternatives to a Line of Credit Loan 

A home loan line of credit is not ideal for everyone. Here are some alternatives you could consider:

A redraw facility, which provides access to extra repayments you have made on your mortgage. 

If you are not 100% clear on what happens to a redraw facility once the mortgage is paid off, take a look at this article

Release equity from your property where you basically sell off a portion of the value of your home. 

You can also use a 100% offset account that is linked to your home loan. Here you can deposit your savings and then offset the funds against the amount due on your home loan.

For smaller sums of up to $20,000, personal loans might be a better option. For larger amounts, you may be better off with a traditional home loan as these have lower rates and are repaid monthly, which means you won’t be hit with repaying the entire loan at the end of the term. 

Is a Line of Credit Home Loan the Right Choice for You?

A LOC is a flexible financing option that is best suited to people whose income fluctuates, so they make additional payments when they have more money coming in, and not be burdened with monthly repayments in months when income is lower. 

That said, it can be tempting to have an almost unlimited amount of credit at your disposal. If you are the kind of person who doesn’t have a lot of discipline when it comes to spending and budgeting, then a LOC might not be the best idea.

FAQs:

1. Is a line of credit the same as a mortgage?

No, unlike the standard mortgage, a home loan line of credit works like a cheque account from which you can withdraw money when needed without applying for a new loan. A mortgage pays out the funds in one sum and the only way you can get more is if you refinance your home loan. 

In terms of repayment, a line of credit loan in Australia needs to be repaid in 30 years, while the average time to pay off a mortgage is between 10 and 30 years.

2. Does a line of credit need to be paid back?

Yes, although you only pay interest for the duration of the loan, in the end, you will have to pay back the principal borrowed as well as the interest on the amounts you have withdrawn. 

Although this type of flexibility can seem very appealing, it is best to consult a financial advisor before you approach lenders. A professional will answer all your questions, from basic ones like ‘what is a line of credit home loan’ to more complex issues, such as ‘what happens if I can’t pay off my LOC loan’

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