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Lines of Credit and Home Equity Loans are essentially the same thing. They are variable rate loans that allow you to borrow against the equity in your own home at your own discretion.

How does it work?

Generally a lender will allow you to take lines of credit up to a point where the total amount borrowed against your property is 80% of its valuation. However you must still be able to show that you could service this loan if you were to fully draw down all the money. There are a few lenders who may lend past 80% but this would mean you would have to pay Lenders Mortgage Insurance. In general most lenders will not.

Features

• Ability to draw on funds as required for any purpose. Eg Minor renovations, investments, holidays. Generally the minimum drawing will be $500
• Ability to have multiple accounts to keep drawings separate for taxation and accounting purposes.
• Ability to repay amounts anytime at no charge
• No repayments required so long as you are within your credit limit. That is in general you can allow the interest to accumulate in your account.
• Generally offer cheque book access
• Ability to transfer between accounts using internet banking

When is it used?

When used properly a line of credit can offer the following:

• A source of funds to act as a safety net for unanticipated expenses eg Family emergency, emergency home repairs.
• A flexible tool for wealth creation eg by providing funds as a deposit for an investment property, funds to buy managed funds or shares, etc.
• The ability to consolidate higher interest rate debts into one lower cost loan eg consolidate personal loans and credit cards

Limitations on use

Whilst you are free to use your lines of credit for just about anything there are some important exceptions as follows:

• To develop the property being used as security. The logic here being the lender is lending against your house and land. If for any reason the bank is forced to come in and sell the property and it has been knocked down in part of full then they may not be able to recover their money as if the proper house and land where there.
• For business use. Many lenders will not provide lines of credit where they know it will be used to purchase a new business or support an existing business. This is due to the high failure rate of businesses and legal risks to the lender as to whether they should lend you the money when they know there is a higher risk.