HELOC v Refiance, Explained for dummies?

Discussion in 'Investment Strategy' started by PlatinumProperty, 3rd May, 2020.

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  1. PlatinumProperty

    PlatinumProperty Active Member

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    Hi, I have heard on a lot of podcasts (mainly american) these two terms. What are they? How can they help the average investor purchase more properties. What would you recommend? With serviceability issues in the future what is best to assist your property investment journey?
     
  2. Lindsay_W

    Lindsay_W Well-Known Member

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    HELOC ie. Home Equity Line of Credit? The other is just refinance, refinance is a refinance it's not some special product.
    What do you want to know about LOC's?
    They typically have a higher interest rate (except with a few lenders) They're an old product, used to be common, now not so much. True evergreen LOC's are few and far between, I know of 2 out of all lenders in Aus offering them (evergreen means Interest Only for the life of the product, most LOC's now have limits on the Interest Only time frame making them no better than a typical term loan)
    In regard to serviceability they are treated the same or worse as any other home loan product so won't help to increase borrowing capacity...
    Lending is different in US to here, stick to the Aus podcasts
     
    Last edited: 3rd May, 2020
  3. PlatinumProperty

    PlatinumProperty Active Member

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    I’m just looking at purchasing my second property. Make it a ppor for 12 months while renovating and then assess after that. I have about 60-70k equity in my first property. Would you recommend against a line of credit?
     
  4. Lindsay_W

    Lindsay_W Well-Known Member

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    Without knowing your full financial situation I hesitate to recommend anything however, why do think a LOC would be better vs a standard variable term loan?
    The equity in your first property can be released via either product as a second loan split, likely to have a higher rate on the LOC though.
    Have you got a broker? If not, I highly recommend engaging one who can assess your options and present them to you, rather than trying to figure it out yourself.
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Locs are typically

    Repayable on demand

    and are in fact and IO redraw loan - your money becomes the banks money

    Assume u have a 400 k LOC limit and you have 100 k of your own money in it

    Lender runs into liquidity or funding cost issues, your limit is now 300, and while at the bottlo your purchase is declined

    IO with offset is typically safer

    ta
    rolf
     
  6. PlatinumProperty

    PlatinumProperty Active Member

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    I didn't necessarily think it was better I was just gaining understanding as to what both products are.
    Thanks for your help
    No i am in the process of speaking to someone, I used a broker for my first property but dont think he was appropriate going forward.
     
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  7. PlatinumProperty

    PlatinumProperty Active Member

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    Ok, thanks for explaining that. Certainly makes sense
     
  8. Trainee

    Trainee Well-Known Member

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    Seriously dont confuse yourself with american podcasts, at least in relation to financing and legal stuff.
     
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  9. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member

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    A line of credit is a product, just another loan. A refinance is a loan application process.

    The LOC is is really just a variable loan with a few particular features, also missing a few others. Lenders tend to price them more expensively than a regular loan and there are a few things that are risky (such as repayable on demand). Overall it's very rare that I'd recommend a LOC.
     
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