A line of credit is a essentially a perpetual 'interest only' home loan secured by your home or other investment properties. Thus if you have a line of credit for $300,000 on which you owe $250,000, you pay interest only on the money you have borrowed (plus any administration costs the lender may impose). These facilities can be an integral part of a sound property investment finance structure.
In some cases lines of credit do not require you to make regular payments so long as you remain within the credit limit - this is called capitalised interest. Instead, when interest is charged to your account it is added to the balance of your home loan. Thus for instance using the example above, if you need to pay $1,500 for interest on the $250,000 instead of being required to pay that amount into the loan, it simply becomes a loan of $251,500 which you pay back when you like. But of course if your credit limit is $300,000 and you're already borrowed to that limit, the lender is going to want to see some payments into your account to service the interest.
As you can see, a line of credit is one of the most convenient forms of credit. Its also more risky for people who don't keep a watch on their finances. If you have a line of credit, always keep track of how much you owe. It's a good idea to talk it over with your mortgage broker to ensure the line of credit is the best home loan product for your needs.
Note also that lines of credit are regarded by most lenders as premium products. They usually charge a higher interest rate on lines of credit. With a few exceptions this is even true within 'professional packages'. Contact us to find out which lenders will offer professional package type discounts on lines of credit. And if its hard for you to qualify for a professional package line of credit, we've set out some ways in which you can use cheaper products to give you the same results as a more expensive line of credit.
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