The Power Of A Line Of Credit Home Loan

A Line Of Credit involves having all your income paid into your loan account, and can be a very powerful tool for reducing the size of your loan and the time it takes to pay it off.

With a Line Of Credit, every time you receive income into your account – whether it be your salary, interest, investment income, etc – you are actually reducing the principal amount of your loan, because your total income is treated as a repayment on the loan, rather than just the minimum amount needed as a repayment.

You can still draw on your income in the usual way, but any withdrawals are treated as a redraw on the loan, leaving the rest of your income in the account to help reduce the total loan amount.

Interest on these types of accounts is calculated daily on the loan amount outstanding and charged monthly in arrears, so if your income has gone into the account and paid off more of the loan, the interest added to the loan will be less.

For example, if the total loan amount is $10,000 and your monthly salary of $2,000 comes into the account, you will only be charged interest on the remaining $8,000 for as many days as you don’t touch your salary.

If you have to dip into the account for $1,000 to cover the household expenses, your interest payments will then be charged on the $9,000 remaining outstanding.

Line Of Credit Home Loan is similar to an offset account, and is a good money management tool that can be used by just about anyone, as they require very little ongoing effort and usually attract no extra costs.

The great thing about this tool is that it’s a great way to highlight your mortgage as a forced saving – you’ll make the repayments before you spend on just about anything else, and constantly seeing the reduced loan principal show up on your bank balance is a great incentive to further curb your spending and watch your cash flow.

As with anything to do with mortgages, it is important to get the right advice from a mortgage broker, who can take into account your circumstances, and whether salary crediting is right for you.