Line of credit

Imagine you have your weekly pay deposited straight into your loan for 7-8 weeks while all your expenses are placed on the credit card for 55 days (or what ever the interest free period is), then you would with draw on the line of credit to pay off the credit card in full at the end of the interest free period. Of course you have to budget and your expenses constantly need to be less than earnings to gain maximum benefit. People that can budget effectively will benefit by reducing the loan quickly while saving thousands in interest. The down side and this is why banks now push an offset account instead of a line of credit is you can draw back to the maximum loan amount at any time, generally people end up in trouble as they continually draw down on the line of credit for holidays, cars, depreciatable assets. If utilised correctly it will save you thousands in interest. Google offset calculators you will be amazed at the savings.

 

Yes something like that

 

Thanks @York that makes sense. Appreciate your help

 

You can get into exactly the same mess with an offset account I'm afraid. Less so if it's offsetting a P&I loan, but still a mess.

It was a huge win for banks packaging loans and getting everyone to use credit cards.

'Paying your loans off faster is possible, but for 80% of people it's just a gateway to living beyond their means.

 

Yes I very much agree with you there, most are tempted to buy new cars, boats, holidays etc, as there is no regulation on the redraw. If you can't budget DO NOT apply for a line of credit.

 

Say you have $1mill in IP loans plus a $200K loan increase that's kept and untouched in an offset account.

When the bank does serviceability calcs for a new purchase, do they assess you as having $1 mill in debt or 1.2 mill?

 

$1.2M.

 

Interesting ok tx

 

It is money you are able to draw on, you only pay interest on the portion that is drawn while it is drawn. It is used for flexibility and convenience. If you just happen to come across a property for sale you can make a spur of the moment unconditional offer and possibly get it at a good discount or at least get the box seat. You don't have to pay much more interest with LOCs. You can fix whatever portion you want of the drawn funds at whatever the fixed rate is they don't prevent you from fixing the loan. Getting LOCs before APRA tightened rules has meant some people have money available now ,that they may not have access to if they waited until they wanted to purchase to borrow. I have an LOC at 4.65%which I thought was a good rate.