When you get funds through a line of credit, it implies you are withdrawing money from your mortgage based on the amount of equity you have built up in the loan.
You can take out the line of credit and spend it in any manner or on anything you like, from home restoration to a car to a holiday or even finance another property investment or purchase.
Most financial institutions will lend you up to 80 per cent of your property’s value. Some will raise it to 90 per cent or even 95 per cent. However, the 80 per cent limit is the standard. Using our example of a $600,000 mortgage with a $200,000 loan balance, this indicates you can lend up to 80 per cent of the house’s value.
$600,000 x 80% = $480,000
$480,000 – existing debt of $200,000 = $280,000
Hence, the amount you can access through the line of credit = $280,000
You are only required to repay the money you spend, not the entire line of credit that the bank extends to you.
For instance, if you have a $280,000 line of credit and spent $50,000 on a car, you would pay interest on the $50,000, not the entire $280,000.
Upfront Charges. Many financial institutions charge an application fee. Then there is also a valuation fee and discharge fee when the mortgage ends.
Interest Charges. The lenders’ levy interest on the amount you spend, not on the entire credit limit.
Ongoing Fees. Even some financial institutions ask for a small monthly fee in addition to the application fee.
With many lines of credit loans, you will get the flexibility of not making regular or monthly repayments. You do not have to make the repayments until you exhaust your credit limit in several cases.
For the first few years, the line of credit home loans is often interest-only, indicating you pay the interest now and repay the borrowed sum later.
This will keep your cost down. However, continuing this for an extended period could cost you a lot in interest.
You can save on the interest payable over the term of your loan by using your earnings to offset the home loan account. You can quickly achieve it by depositing your income into the mortgage account and then withdrawing funds as required to meet your living expenses from the line of credit. With this approach, the interest on the loan is only evaluated on the outstanding balance of the account, which will reduce your interest charges.