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Used wisely, a line of credit facility is an excellent tool for building your portfolio and growing your wealth.
Blogger: Warren Dworcan, managing director, Rate Detective Finance
A line of credit (LOC) or Home Equity Loan allows borrowers to withdraw funds out of the equity in their property up to a set limit, usually 80 per cent LVR, at any time. Used wisely it is an ideal way of getting what you have always wanted or to improve your portfolio.
The great thing about a line of credit is that you only pay interest on what you use. So if you draw a LOC of $100,000 but only use $20,000 for renovations or a purchase, the only interest you have to pay is on that amount, as the $80,000 has been untouched.
Rather than saving up another deposit for your next addition to your property portfolio, it is common to use a LOC as a down payment instead. If your strategy involves increasing the value of your property then using your equity for renovations can be a profitable move if the resulting capital gains are greater than what was paid.
Practiced smartly a line of credit can be useful to purchase other assets or items. An example is that you have the advantage of financing a car at home loan rates. As the interest rate of a credit card is slightly higher than the standard variable you can effectively use it in the same manner but with a lower rate and higher limit.
If you are thinking of taking out a LOC it is important that you have the financial nous to be adequately prepared. Since the only requirements are that the interest is paid when due and to stay within the credit limit it may be tempting to go on a spending spree. This is a dangerous game as frivolous use could mean the principle may never get paid down. So if you do not budget or cannot restrain your expenses your loan could keep extending to the point where it becomes difficult to make repayments.
When utilised effectively, a line of credit can achieve your various goals. Whether it is building your portfolio, renovations or a holiday a line of credit can be used for almost anything. However, failure to exploit its attributes could result in you ending up with a loan you can never pay off.
About Warren Dworcan
Warren Dworcan is the Managing Director of Rate Detective Finance, which provides information to consumers about home loans, credit cards, personal loans and personal insurance.
Successfully assisting thousands of Australians with loan enquiries in excess of more than $1 billion, Warren alongside his highly qualified and dedicated staff are equipped to deal with all aspects and complexities associated with the mortgage market.
Over the last two years Warren has been dedicated to growing the business into becoming one of the leading independent brokerages in Australia.
Recently recognised as one of the top brokers in Australia, Warren was awarded the coveted Australian Broker of the Year award in both 2012 and 2013 at the Australian Broking Awards in Sydney.