finance

Line of credit mortgages

By Simon Parker

If you’re looking for a loan that gives you considerable flexibility with your repayments – and the ability to draw down additional funds – you might want to consider a line of credit.

 

This product is particularly popular with investors and also borrowers who have an aggressive mortgage reduction strategy.

A line of credit is essentially an interest only loan.

Borrowers can pay as little or as much toward the principal each month – as long as they meet their interest repayments.

As a line of credit borrower your loan is usually linked with a credit card with an interest free period which, in theory, allows you to drive down the principal sum by paying your income directly into the loan balance.

You then use the credit card to meet your monthly expenses and then repay the balance from your loan at the end of the month. This effectively reduces the overall loan balance for the whole month, reducing the interest charged on the loan.

A line of credit also allows you to withdraw funds up to the maximum limit at any time – without approval from the lender. This can enable investors to move quickly when an opportunity arises, giving them significant control over their finances.

This product can also be a very powerful mortgage reduction tool for disciplined borrowers with a tight control of their finances. Borrowers who combine tight budgeting with effective use of the credit card facility can repay their mortgage years ahead of schedule.

The interest rate on a line of credit is generally variable and tends to be more costly than the standard rate.

While there are considerable benefits with this product if it is used properly, there are also significant dangers should you lose control of your finances.

The danger is that rather than reducing your mortgage, you may end up adding years to your loan. Without a clear strategy, borrowers can find themselves saddled with a loan that never goes down.

Living off credit can be tricky, and it takes discipline. Budgeting is essential, otherwise you could end up paying the same in interest as you would under a standard loan, or more.

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