How does a Line of Credit work
How does a line of credit work and is it for me?
How you structure your mortgage can be a big decision. One of the decisions that you may be considering is taking out a line of credit. Essentially, a line of credit allows you to access the equity you have in your home. For example, if your home is worth $300,000 and your mortgage is $100,000 you have $200,000 in equity. Many banks will allow you to access around 80% of this equity. This equity then becomes your line of credit.
So now you have a line of credit, how does it work?
Well firstly, you only pay interest on the amount that is used. For instance, if you have $100,000 line of credit and have taken out $30,000 then you will only pay interest on the $30,000. This interest is often added to your line of credit meaning you don’t have to make repayments. This interest will keep accumulating until you reach the limit on your line of credit.
Can I pay off my mortgage faster using a line of credit?
Many people consider depositing their pay in to their line of credit account. This will then sit against your line of credit reducing the outstanding balance, thereby the interest payable. If you tend to save money this will also remain against your mortgage and again further reduce your interest payable.
What should you consider before getting a line of credit?
Firstly, if you are a saver or have your pay deposited and it stays there for several weeks then a line of credit may benefit you as you will reduce your interest payable.
If you tend to live beyond your means then a line of credit can compound this problem and your spending can become more out of control as you have access to more funds. This time rather than just maxing out your credit card you are putting your home on the line so consider this carefully before you take out a line of credit.
Consider how you plan to spend the line of credit. If you have some renovations to do or plan to add value to your home then a line of credit can be a good way to finance this. If you simply want to go on holidays or use the money for more frivolous means then again carefully consider getting a line of credit.
Remember that you and your situation are unique. If you would like to discuss a line of credit and whether or not this would suit you then feel free to call me or one of my staff and we can talk you through the process.