Should You Get a Line of Credit?

Also known as equity lines, lines of credit offer access to large sums of money, but come at the cost of paying interest. Still, you can make your line of credit work for you.

A line of credit allows you to draw down on the equity you’ve built in your home. As such, having a line of credit is similar to having a large bank balance at your disposal. The only difference is that you need to pay interest on every dollar you spend from that balance.

You’ll have a borrowing limit, which you can use all at once or in bits and pieces. Usually, this limit is set at 80% of the value of your property, though this depends on the lender.

A Quick Example

Imagine you have $300,000 as your line of credit. You spend $60,000 on renovations for your home, instead of taking out a new home loan. That means you need to pay interest on the $60,000 you’ve spent. The other $240,000 doesn’t accrue interest until you spend it on something.

You could start making repayments straight away, or you could capitalise your interest. This means you can add your repayments to the money you’ve drawn from the line of credit until you reach its limit.

Let’s come back to our $300,000 example. You’ve drawn down $60,000 and must repay, say, $700 per month. By capitalising this payment onto the amount you’ve already drawn down, you essentially use $60,800 of your credit after the first month. Your lender will then adjust the next month’s repayment accordingly to meet the new amount. So, you may pay $715 on $60,800 during the second month. This will continue, with the payment amounts increasing each month, until you hit your credit limit.

What Happens When You Hit the Limit?

When you hit your credit limit, it’s time to start making actual repayments. As an interest-only type of credit, you build equity in your line of credit when you place funds into the facility.

You have some flexibility with this. You could pay off the entire debt, allowing you full access to your line of credit again. Or, if you can’t afford it all, you could pay a small portion of it. You should remember that your lender will continue charging interest on the leftover debt, however.

The Benefits

You have a lot of flexibility when it comes to managing your repayments, so you can often control their size and frequency. This can make a line of credit a more attractive option than refinancing your home loan. In fact, many lenders refer to lines of credit as “evergreen” loans because there’s no set time limit for your repayments.

Furthermore, the equity you’ve built in your home will rest in your account until you need to use it. As such, a large portion of the credit can sit unused without gaining interest. You still have access to it when you need it, but you don’t have to worry about what this unused money is doing when you don’t use it.

Lines of credit can also help you to build your home’s value without taking out a new home loan. You can borrow money from your line of credit and pay it back at the existing rate. Most borrowers prefer this to taking out a new loan that reflects the higher value of the property upon completion of the renovations.

The Drawbacks

Lines of credit can come with higher interest rates. Lenders only charge this rate on the money you use, but the interest can come back to bite you if you don’t keep it under control.

Most lenders also charge set fees for use of your line of credit. These differ depending on the lender, with some charging a monthly fee and others an annual fee. You might expect to pay somewhere between $120 and $350 per year, though some lenders charge higher fees.

Furthermore, using the equity you’ve built could mean you take longer to pay your home loan.

Need a home loan?

UNO. The new way to get a better deal.

Get Started

Should You Get a Line of Credit?

And so we come to the big question. You need to think about your circumstances before you decide if a line of credit will work for you. This is not a home loan feature that you should use for impulse purchases. Instead, it’s all about control. You need to know what you’ve spent and understand exactly how you’re going to make your repayments to take full advantage of a line of credit.

Lines of credit are most useful for those who’ve built a large amount of equity in their homes. This provides you with a pool of money to draw from for other large purchases, such as buying a car. Your line of credit will usually share the same interest rate as your home loan, which is usually lower than the personal loan you may otherwise have used for the purchase.

Furthermore, investors often use their lines of credit to buy shares. When they sell the shares, they place the money back into the line of credit, which builds the equity they have in their homes.

All of this means that lines of credit are for people who can control their finances. As a general rule, you should only take out a line of credit if you know you can put in more than you draw out.

What to do next

Depending on how you use it, a line of credit can be a benefit or a burden. Before taking one out, you should:


Book Call Now

UNO home loans

TESTIMONIALS

What our customers are saying

Gabe Windsor
October 26, 2023
What a fantastic experience using UNO Home Loans. Mike Parsons and the team were exceptional. Such an easy, hassle free experience, cannot recommend them highly enough. Mike Parsons was in touch every step of the way, and with him doing all the leg work, the transition to a refinanced home loan was a very easy one. Thank you!
Read more
Laurisa Sticotti
July 1, 2023
Scott Wilkinson has been fantastic when dealing with my broking needs. He has held my hand through every step of the way and has made purchasing my first home a much more comfortable experience than I anticipated.
Read more
Thusi Gamage
July 1, 2023
Awesome team, Very reliable and friendly. Scott Wilkinson is very experienced and knowledgeable.He guided us throughout the process and was available to help.
Read more
Omar Zazou
June 1, 2023
I have worked with Scott Wilkinson to get my home loan and he has been a massive help to navigate my first home purchase. He has taken care of all the financial details and I didn't need to worry about anything. Highly recommend him for his professionalism, patience and support!
Read more
Kelly O'Connor
June 1, 2023
You won’t find any broker better than Anita at UNO. We’ve told all our friends and family about her and will be using her for all our mortgages in the future! A stress free process from the start. She listened to our needs and was always available.
Read more
Ashley Morson
We are truly grateful for uno home loans and our broker Karis Churchill. This is our second time purchasing a home with the help from Uno and both times have been a very positive experience. Our recent purchase had many obstacles due to different factors however it was our dream home and we were up for the challenge. Our broker Karis was a true support and went above and beyond. She communicated so well with our solicitor and the real estate agents. She kept us updated through every step and kept us motivated when things seemed impossible. Uno is very fortunate to have Karis as a broker and we would highly recommend her to anyone. Our family are so happy we are now in our new forever home. Thank you so much Karis and to the uno team!!!
Read more
Ebubekir Demir
Thank you Eren for your quick and efficient turn around time to getting an approval for a loan. Will be recommending you to anyone that needs a quick and reliable loan.
Read more
No items found.