Many people often ask us what is the difference between a Home Loans and a Line of Credit facility and which one is the best. The simple answer to which is best is, they both are – depending on your situation and how you are needing your finance structured.
Home Loans:
A Home Loans facility has two main characteristics: they have scheduled loan payments and a specific loan term. Home loans are the most common product used in the market as they are flexible. Often offer the best rates and can be tailored for your situation. Loan terms are generally up to 30 years. You can have interest only or principal and interest payment as well as fixed, variable or a combination of both. You are also able to have offset accounts and redraw of extra payments. One other benefit occurs if you find yourself in financial hardship. There is much more flexibility available on a home loan product to provide you with assistance.
What are scheduled payments?
Having scheduled payments means that there is a certain amount of payments required over the term of the loan to be made on a monthly basis as a minimum. The terms of which are contained within the contract.
Line of Credit Facilities:
A Line of Credit is somewhat the opposite of a home loan when considering its main characteristics. Line of Credit facilities do not have scheduled payments and are conducted in the same manner as a you would a credit card which is in essence what they are – a big credit card.
There is no expiry date provided you stay within the approved limit and due to only needing to ensure the limit of the facility is not exceeded, you do not need to necessarily make regular monthly payments. This is referred to as an Evergreen facility (no expiry date). There are variations to the Line of Credit that blends Home Loan type characteristics. Line of Credit facilities are also interest only at all times.
Which is better, home loans or line of credit?
Line of Credit facilities are more commonly used for investment purposes given they are interest only facilities. In which the interest only period does not expire which can allow an investor to maximize taxation benefits of an investment property without having to renegotiate their contract.
As there are no required monthly payments there is greater control of your spending required. Like a credit card, they can allow borrowers to spend more than they should if you are not disciplined. Home Loans on the other hand generally have a better interest rate. It offer many of the flexibilities of a Line of Credit but provide a timeline for repaying the debt. They are favored more by lenders and are usually more appropriate for owner occupied loans. Specially, first home buyers. There are also reduced loan to value ratios available on a Line of Credit products.
Like any facility you should speak with an experienced mortgage broker to ensure you are receiving the best possible product for your current and future needs.