Also known as an ‘equity line’ loan, a ‘line of credit’ loan (LOC) is a product that allows you to borrow up to a certain percentage of your property value. While savvy investors who look to treat their money wisely won’t treat it like one, a line of credit loan can be seen as a ‘big credit card’ or a ‘big cheque book’.
Using your equity, you should be able to achieve a loan in this structure that will provide you access to a certain amount of ‘extra’ funds to assist with any number of investment expenses.
The beauty of this product is that you only pay interest on the amount that you use, explains Multifocus Properties and Finance’s Philippe Brach. For instance, while you may have a $200,000 line of credit, if you’ve only used $50,000 then you will not pay interest on the remaining $150,000.
Having extra funds available to use whenever you need them can be extremely helpful when it comes to maintaining an investment property and providing a safety net should you need significant funds to draw on at short notice.
Aussie mortgage broker Ross Le Quesne explains that you might use it for “deposits on new investment properties or for renovations, and sometimes you can create a small line of credit to put rental income into and pay property expenses and loan repayments out of that particular line of credit”.
If you are in need of the next deposit or funds for a renovation that you know will give you a great return, having a line of credit for when other funds aren’t forthcoming can assist with boosting your portfolio.
Mr Branch explains that a line of credit can be one of the easiest ways to tap into equity you have available in other properties. “People who own their homes or have a mortgage on their home and want to get into an investment property using the equity should take a look,” he advises.
The easiest way to access the equity is to use the line of credit. It works like a big credit card, except you pay home loan rates rather than credit card rates.”
With payments made flexible via chequebook, BPAY and other options, it also becomes the ‘day-to-day’ account for your properties.
“All your rents are collected into that account, and rates and agent fees get paid out of the LOC,” says Mr Brach. “That interest is all tax deductible.”
While this feature can be useful for a number of investors, those who are not ready to take a disciplined approach to money management will want to steer clear.
In fact, those who are likely to make ‘impulse’ purchases, or who may buy personal items (such as that holiday that you need upfront funds for) should not be considering an LOC. Investors need to be disciplined enough to use their line of credit for investment purposes only in order to avoid confusion over tax deductibility.
When it’s not applicable
In order to get a line of credit, you will need to have equity in a property that you can tap into. “Up to 80 or 90 per cent of the existing value of their current home can be used,” says Mr Le Quesne. “You’ve got to have the equity, so it depends on the individual’s financial circumstances.”
He also explains that while some people can’t, others may not want to: “this may be people who have large amounts of cash reserves, big funds or buffers in an offset account already.” These may not be able to get the most benefit from a line of credit.
Jennifer Duke, Smart Property Investment, September 2013 issue