The short answer
A line of credit is a home loan that works like a large overdraft secured against your home. You’re approved for a limit, draw money when you need it, and pay interest only on what you’ve used. Moneysmart describes it as a way to access the equity in your home without applying for a new loan. Interest is usually added to the balance, so the debt can grow if you don’t pay it down.
How a line of credit works
- A limit, not a lump sum. The lender approves a limit based on your home’s value, your equity and what you can afford. You don’t have to use it all.
- Draw and repay as you go. You can take money out, pay it back and draw it again, up to the limit.
- Interest on what you use. Interest is charged on the balance, not the limit. Moneysmart notes that interest is added to the loan each month and repayments aren’t needed while you’re within the limit.
- Secured against your home. Like any home loan, if you can’t pay, your home is at risk.
Your home is valued at $900,000 and you owe $450,000. A lender approves a line of credit with a $150,000 limit.
You draw $40,000 for a renovation. You pay interest on the $40,000 you’ve drawn, not on the full $150,000.
If you pay it back, the full limit is available to use again.
An illustration only. Lenders set limits and assess borrowing in their own ways.
What people use a line of credit for
- Renovations paid in stages, where you don’t know the final cost up front.
- A deposit and costs for an investment property, using your equity.
- A cash buffer for irregular income, such as self-employed or seasonal work.
Using one for everyday spending can be risky, because the debt is secured against your home and can grow if it isn’t paid down. Moneysmart also warns that moving unsecured debt into a loan secured over your home adds risk, because your home could be on the line if things go wrong.
The risks to weigh
- The balance can grow. If you don’t make repayments, interest is added to the balance and then earns interest itself. Without a plan to pay it down, the debt can last for years.
- It takes discipline. Easy access to a large limit makes it tempting to spend.
- Cost. Moneysmart notes that home loans with more options or features can cost more. Check the rate, any fees and whether you’ll use the flexibility.
- Mixed purposes. Using one account for investment and personal spending makes the interest harder to separate for tax. Your accountant can explain how that applies to you.
See how a line of credit compares with other ways to use your equity, across lenders on our panel.
Book My Investor ChatLine of credit, loan split, redraw or offset?
- Line of credit: a revolving limit, usually with interest added to the balance. Flexible, but needs discipline.
- Loan split or top-up: a set amount for a set purpose, with regular repayments. Easier to track, and the debt reduces over time. See our equity guide.
- Redraw: access to extra repayments you’ve already made on your loan.
- Offset account: your savings sit in a linked account and reduce the interest you pay. See how offset accounts work.
Not every lender offers a line of credit, and the features differ between those that do.
How a broker helps
We start with what you want the money for. Then we compare a line of credit with a loan split or other structure across lenders on our panel, and show you the repayments and costs before you decide.
Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone, evenings included. About Daniel
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.