A home equity line of credit is a line of credit facility specifically used to release equity from a home with available equity. This is a specifically a loan type which is designed for consumers to draw against residential property for personal use or personal investment. Businesses do have similar facilities but these fall under business line of credit facilities. Here’s everything you need to know about line of credits attached to home equity.
How does a Home Equity Line of Credit Work?
A home equity line of credit works by releasing unused equity in your property into a loan facility which you can then draw from as needed through online banking. To determine how much equity you can draw into a line of credit, you need to look at 80% of the current value of the property, minus any existing loans. For example if your home is worth $400,000 and you owe $100,000, you could then at a maximum setup a line of credit of $220,000 against the property to keep within the 80% maximum loan to value ratio.
You would also need to meet the lending requirements including serviceability to service that additional debt.
Once approved that $220,000 sits as available funds which depending on the lender you will be able to access viable internet banking, in branch or via card facilities.
Why would you want to use a Home Equity Line of Credit?
Line of credits attached to your home equity allow you to leverage assets to free up cash which you can then use for investing or for personal use. If you are planning to invest in property the line of credit funds can be used as the deposit for your next purchase, or it can be used to purchase shares.
For personal use a home equity line of credit is useful when you need to make multiple payments – for example if you were renovating your home as you can draw from it as needed to pay for each individual contractor and supplier.
In general the benefit of lines of credit such as this is the flexibility in accessing your funds instantly as needed and only being charged on the interest as you draw from your LOC account.
Downsides of Line of Credits
Whilst incredibly flexible and providing a range of options for the use of your funds, line of credits attached to your home equity do have some negatives including:
- If you apply for any further loans most lenders will treat your line of credit as a liability which is fully drawn, even if no funds have been used which can significantly reduce your borrowing capacity
- Most lenders will charge a higher interest rate on line of credit facilities instead of their standard loan accounts
- Many lenders do not offer home equity line of credits, so you will be limited by which banks you can work with if you require this type of facility
- Generally the financial institution reserves the right to cancel your line of credits available balance at any time which could impact investing or other personal plans you may have for those funds
- Remortgages are still possible for those with poor credit, however the number of lenders are greatly reduced if you’re also wanting the loan facility to be a line of credit
Are there alternative ways to access home equity besides a line of credit?
Line of credits were previously very popular due to their flexibility compared to most term home loan products, however with the increased innovation of these products, introduction of offset accounts and technological improvements with online banking, its now possible to mimic most of the flexibility benefits with a standard variable home loan with an attached offset account or a variable home loan with a fully accessible redraw account. Depending on your needs, this may save you money with lower fees, interest rates and greater availability of lenders. It’s best to speak with a financial professional to get the right advice on whether drawing your home equity through a line of credit or a home loan is better for you.
If you’d like advice on whether a home equity line of credit would be the best loan product for your scenario, speak with one of our mortgage broking experts who will be able to provide a free analysis of your situation and provide advice on the best products for your needs.