LINE OF CREDIT
A line of credit (LOC) is a loan secured against your home or investment property that you can draw down on and repay when you want. It offers ultimate flexibility.
Key features are:
- Draw down as much as you like up to your loan limit
- The interest rate is variable
- Your interest is calculated daily on the amount of funds drawn down on that day
- Interest is paid monthly and must be paid (cannot be added to the LOC)
- Interest rates are generally higher than traditional loans
- Once in place, you can use the funds for whatever purpose you wish
Examples of where a LOC are used include:
- Investors using the equity in their home to invest in the share market
- For renovations to their home or investment property
- As a deposit for an additional rental property
- To purchase a car or holiday
Using the equity in your home for investment purposes in this way can be an effective form of financing as home loan interest rates are often the lowest in the market.
With a LOC you must be disciplined in respect of what you use the funds for. You must always bear in mind that you are spending the hard earned equity in your home.