14 October 2013

Is line of credit right for you?

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line of creditMost of us have heard the term ‘line of credit’ before. It sounds promising, but what is it and how can we use it to boost our investment potential?

A ‘line of credit’ (LOC) is a product that allows you to borrow up to a certain percentage of your property value. It is also known as an ‘equity line loan’.

Using the equity you have already built in your property, you will be able to achieve a loan structure that will provide access to a certain amount of ‘extra’ funds to assist with any number of investment expenses.

The benefits
The beauty of a LOC is that you only pay interest on the amount you use. For example, while you may have a $200,000 line of credit, if you’ve only used $50,000, you will not pay interest on the remaining $150,000.

A LOC is extremely helpful for investors who may require additional funds to help maintain their investment property, while also providing a safety net should you need significant funds to draw from at short notice.

Some examples of the types of situations where you might use a LOC include as a deposit for a new investment property, or when renovations need to be made to a current property.

This is a great option for anyone who owns their home or has a mortgage on their home and wants to take that first step into property investment, but may not have enough cash for a deposit.

The disadvantages
While this feature can be useful for a number of investors, if you are not ready to take a disciplined approach to money management, you may want to look at other options.

Investors need to be disciplined enough to use their LOC for investment purposes only in order to avoid confusion over tax deductibility. If your expenditure is not carefully regulated, you could find yourself in a difficult situation with the Australian Taxation Office (ATO) at tax time.

A LOC can also involve more expensive rates than standard borrowing. It is important to remember that this debt needs to be paid back and the interest capitalises on a daily basis. Unless you’re regularly paying it back and are incredibly disciplined, you could find yourself in trouble.

To find out if a ‘line of credit’ is the best option for you, get in touch. We’re here to help.

 

Call Anusha Haran on 0406 922 579

Finance Consultant

 

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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