What is a line of credit home loan?

So you’re a homeowner who has been diligently paying off your home loan for a handful of years or more. You may be able to access that equity with a line of credit loan. 

Whether you want to buy a car, renovate your home, purchase an investment property, or just have fast access to cash for a rainy day, a line of credit loan could be what you’re looking for. Let Compare Club help you find it.

What is a line of credit loan and how does it work?

A line of credit loan enables you to borrow money against the value of your home, less the amount you owe on it. This is known as equity. For example, if your home is worth $800,000, and you owe $500,000 on your mortgage, you have $300,000 in equity.  

Line of credit home loans are typically for property investors or homeowners who want to buy a second property. 

You’ll need to either own a property or be paying off a mortgage on a property to qualify for a line of credit home loan. 

With a line of credit loan, you can access some of the equity you’ve built up in your home — typically up to about 80% of the value of your home. 

Although some lenders may offer up to 95% of the value of your home if you take out Lender’s Mortgage Insurance (LMI). 

You can increase the equity you access with a line of credit loan by:

• Making extra repayments (to pay off your home loan sooner)

• Using an offset account to reduce the amount of interest you pay

• Renovating your existing property to grow its value.

Is a line of credit the same as a mortgage?

No, a line of credit is a loan secured by your home. Unlike a regular mortgage, initial repayments for a line of credit loan are usually interest-only, before the remainder is paid in a balloon amount at the end of the agreed term.

Interest rates for a line of credit loan are often higher than a regular mortgage.

How is interest calculated in a line of credit loan?

Interest on a line of credit loan is usually calculated monthly, where each purchase amount is multiplied with the number of days remaining in the line of credit loan’s billing period. This is known as the average daily balance method.

Is it hard to get a line of credit loan?

It may be difficult to get approved for a line of credit loan if your home is not currently occupied. Lenders will also assess your financial situation and credit history when evaluating your application for a line of credit loan.

What are alternatives to a line of credit loan?

There are many alternatives to a line of credit loan that you can use to purchase property. These include a regular home loan or mortgage, using an offset account and a home equity loan.

What is the difference between a loan and a line of credit?

A regular variable or fixed rate home loan is generally released by your lender as a lump sum, and you are required to pay interest on the full amount. However, a line of credit loan only charges interest on the money you’ve withdrawn. 

For example, if you’ve been approved for a $300,000 line of credit loan, you can withdraw just a portion of the loan as you need it, and only pay interest on the money you’ve actually withdrawn. 

What is the difference between an offset account and a line of credit?

An offset account is a separate deposit account linked to your home loan, while a line of credit is a type of loan. The money you have in this account can be used to “offset” the amount you owe on your home loan, and you'll only be charged interest on the difference.

Is a line of credit better than a mortgage?

It depends on what your needs are. Line of credit loans typically have higher interest rates than standard variable home loans. 

However, line of credit loans tend to start with an interest-only repayment period. That means you won’t have to start paying back the loan principal until the interest-free period ends. 

What is the difference between a home equity loan and a home equity line of credit?

Lenders tend to apply different conditions to each type of loan. However, home equity loans tend to come as a one-off lump sum, whereas line of credit loans enable you to withdraw money as you need to up to an approved credit limit. 

Is it better to get a home equity loan or line of credit?

Again, it depends on your needs. If you require a one-off lump sum, then a home equity loan may be the best option for you. However, if you want the ability to withdraw money as you need it — much like a credit card — then a line of credit loan may be a better fit.

What are some of the possible pros and cons of a line of credit home loan?

A line of credit loan gives you excellent flexibility to withdraw money as you need it (up to your approved credit limit). This gives you fast access to cash without having to go through a loan approval process every time you want to make a withdrawal. 

Many line of credit loans feature an interest-only period, so can be effective for funding a short-term investment opportunity. However, interest rates on line of credit home loans are typically higher than on standard variable rate home loans, and lender fees may also be higher. And there is an element of risk involved — if you can’t repay a line of credit loan you might lose the equity in your home, or even the property itself.

Why might a line of credit home loan be suitable?

Line of credit home loans tend to be most suitable for investors who want to purchase an investment property. Many line of credit home loans feature an interest-only period. 

This can be particularly attractive for property investors who may be looking to purchase, renovate and resell a property — and pay back the loan principal — before the interest-only period expires.

What are the features of a line of credit loan?

A line of credit loan enables you to withdraw money as you need it up to your approved credit limit. Your lender will likely set a minimum monthly repayment, and you can reborrow money you’ve repaid for the life of the line of credit loan. 

While interest rates on line of credit loans are usually higher than on standard variable rate home loans, they are typically lower than interest rates charged on credit cards and personal loans. 

This makes line of credit loans a good option for homeowners who want to finance big-ticket purchases without paying higher credit card or personal loan interest rates. 

What can you use line of credit loans for?

Homeowners often use a line of credit loan to fund home renovations or repairs (usually under $200,000). A line of credit loan can also be used to pay for big-ticket items such a car, holiday or wedding. 

Investors might use a line of credit loan to invest in shares or to purchase an investment property. 

How does a line of credit let me access my equity?

Lenders offer line of credit loans as a way to unlock the equity you’ve built in your home. They typically set a credit limit that is equal to your equity (usually up to 80% of the total value of your home). 

It’s a little Iike turning your home into a giant credit card. You can withdraw money as you need it (up to your credit limit). You can also reborrow money you’ve repaid for the term of the line of credit loan. 

How can I use a line of credit to invest in property?

You can use a line of credit loan to purchase an investment property. However, to do so, you’ll need to have built significant equity in your existing home. If you don’t have quite enough equity to fund the purchase of an investment property, you might instead choose to use a line of credit loan to renovate an investment property and resell it at a profit. 

What are the drawbacks of using a line of credit loan to invest in property?

The major drawback of using a line of credit loan to invest in property is that you’ll likely pay a higher interest rate than with a standard variable rate home loan. Line of credit loans also tend to have higher fees than typically apply to standard variable rate home loans. 

Also keep in mind that if you default on repaying a line of credit loan, you’ll run the risk of losing your home. 

What are some tips for using a line of credit for property investment?

The best advice is to ensure you clearly understand the terms of the line of credit loan. Identify the interest rate you’ll need to pay and whether it is variable or fixed, and know the minimum monthly repayment your lender requires. 

Also be mindful that many line of credit loans begin with an interest-only period. Know when it expires, and how much your principal plus interest repayments will be.  

What should I consider before applying for a line of credit loan?

Before applying for a line of credit loan, there are a few things you should consider. These include your financial ability to repay with high interest rates (compared to regular home loans) and fees, as well as your current home’s equity level. Taking on a line of credit loan is a big financial commitment, so it is important that you consider all factors thoroughly.

Where can I find the best line of credit loans? 

Compare Club is here to help find the right home loan for your needs. 

Whether you’re looking for a variable rate home loan, a fixed rate home loan, or a line of credit loan, we compare home loan products from 40 of Australia’s leading lenders to find the best solution for you.

If you’ve built equity in your property, a line of credit loan can help you fund home renovations, big-ticket purchases, or just keep cash available for a rainy day. 

If you’ve built enough equity in your home, a line of credit home loan can be used to purchase an investment property.  

Compare Club makes it simple, we compare home loan products from 40 of Australia’s leading lenders to find the best home loan for you. Let us show you how much you could save when you apply for a mortgage through our extensive lending panel.

Anthony Stevenson, is the head of home loans at Compare Club. With over a decade of experience under his belt, Anthony is dedicated to helping individuals make informed decisions when choosing a home loan. Whether it's finding a great deal on your home loan or refinancing, Anthony has a wealth of knowledge in the space.

Meet our home loans expert, Anthony Stevenson

Anthony's top home loans tips

• 1

  Refinancing is the smartest, fastest way to lower your repayments and give yourself some breathing room.

• 2

  There’s more to a good value home loan than just interest rates. Are you paying high account keeping fees, or being charged for making extra repayments?

• 3

  Pre-approval and unconditional approval of your home loan are different parts of the same process. Our expert brokers cut through the jargon for you.

• 4

  Home loan pre-approval is not compulsory. It’s possible to begin your home loan application after you’ve found the home you want to buy.