Lines Of Credit
Lines of credit are becoming less widely used with the popularity of offset mortgages, but they still remain a viable product for certain financial situations.
A line of credit is a loan account that has no structured payments or amortisation. With a 30 year term and a limit of $100,000, you could potentially still end up owing $100,000 at the end of the loan term.
A line of credit operates like an overdraft; you have a limit that you can draw up to and each month the interest is charged to the account for what you use. The way the interest is charged can vary on lines of credit, but the most common way is for the interest to be capitalised (charged back to the account), or alternatively you can nominate an external account to debit interest from, the same as an interest only mortgage.
Some owner occupiers will have their incomes credited directly to their lines of credit and operate a line of credit in conjunction with or as their mortgage, paying down lump sums as they clear down the account or as they become available. This is a good debt reduction strategy but takes a great deal of financial discipline.
Investors are the most common users of lines of credit, particularly those with high volume transactions such as share traders and property developers. You can also attach cheque books to lines of credit as they are fully transactional.