Line of Credit

Line of Credit (LOC) is a flexible loan facility that lets you borrow, repay, and re-borrow funds up to an approved limit—similar to a credit card but secured against property. You only pay interest on the amount you actually use.

How Lines of Credit Work

Unlike a standard home loan where you borrow a fixed amount, a line of credit gives you access to funds whenever you need them, up to your approved limit.

Key features:

• Approved limit based on property equity (typically 80% LVR)
• Borrow any amount up to your limit
• Repay and re-borrow repeatedly
• Interest charged only on drawn balance
• No fixed repayment schedule (interest-only typically)
• Minimum monthly repayment: Interest only

Example:

• Property value: $800,000
• Existing mortgage: $400,000
• Available equity (80% LVR): $640,000 - $400,000 = $240,000
• Line of credit limit: $240,000

Usage over time:

• Month 1: Draw $80,000 for investment property deposit, pay interest on $80,000
• Month 3: Draw another $40,000 for shares, pay interest on $120,000
• Month 6: Repay $30,000, balance drops to $90,000
• Month 9: Draw $50,000 for renovation, balance now $140,000

Types of Line of Credit

1. Standalone Line of Credit

Entire loan is a line of credit facility.

Example:

• Property: $750,000
• Loan structure: $600,000 line of credit (80% LVR)
• Rate: 6.8-7.5% p.a. (higher than standard home loans)
• Repayments: Interest-only on drawn balance

When used:

• Investors who want maximum flexibility
• Business owners accessing equity for business purposes
• Property developers (draw for deposits, repay on settlement)

2. Split Loan with LOC Component

Part standard loan, part line of credit.

Example:

• Property: $900,000
• Loan structure:
  • $600,000 standard P&I loan @ 5.9% p.a. (for home purchase)
  • $120,000 line of credit @ 7.2% p.a. (for future investments)
• Total: $720,000 (80% LVR)

Benefits:

• Lower average interest rate
• Forced principal repayment on main loan
• Flexibility for future needs

3. Equity Line of Credit

Separate LOC secured against paid-off or low-LVR property.

Example:

• Home: $950,000, fully paid off
• Equity line of credit: $760,000 (80% LVR)
• Use: Investment property deposits, share purchases, business funding
• Keep home unencumbered except for LOC

Line of Credit vs Standard Home Loan

Interest Rates

Line of credit:

• Rates: 6.5-8.0% p.a.
• Typically 0.5-2.0% higher than standard variable home loans

Standard home loan:

• Rates: 5.8-6.3% p.a.
• Lower because of fixed repayment schedule

Cost comparison ($500,000 borrowed):

• Standard home loan @ 5.9%: $29,500/year interest
• Line of credit @ 7.2%: $36,000/year interest
• Difference: $6,500/year

Repayment Flexibility

Line of credit:

• No set repayment schedule
• Pay interest-only minimum
• Can make principal repayments anytime
• Re-borrow repaid amounts

Standard home loan:

• Fixed monthly repayments (P&I or interest-only for set term)
• Extra repayments go to principal
• Redraw may have limits or fees

Approval and Serviceability

Line of credit:

• Assessed on full limit (even if not drawn)
• Reduces borrowing capacity for other loans
• Harder to get approved (viewed as riskier)

Example:

• Apply for $200,000 LOC
• Only drawing $50,000 initially
• Bank assesses serviceability on full $200,000 @ 8.5% test rate
• Required income: ~$85,000/year to service full limit

Standard home loan:

• Assessed on actual loan amount
• More predictable for lenders

Who Uses Lines of Credit?

1. Property Investors

Use case: Funding deposits for multiple investment properties.

Example:

• Investor owns home worth $1,100,000, mortgage $200,000
• Sets up $700,000 equity line of credit (80% LVR)
• Uses LOC for:
  • Investment property 1 deposit: $150,000
  • Investment property 2 deposit: $180,000
  • Stamp duty and costs: $65,000
• Total drawn: $395,000
• Interest @ 7.0%: $27,650/year (tax-deductible)

Advantage: Reuse the same LOC for multiple deposits as properties settle and refinance.

2. Business Owners

Use case: Working capital and cash flow management.

Example:

• Business owner, home worth $850,000, no mortgage
• $680,000 LOC against home equity
• Uses for:
  • Inventory purchases: $150,000
  • Equipment: $80,000
  • Cash flow gaps: $50,000-$100,000 (draw and repay monthly)

Advantage: Cheaper than business overdraft (12-18% rates) or credit cards.

3. Renovators and Developers

Use case: Funding renovation projects in stages.

Example:

• Buy renovator for $620,000
• $500,000 purchase mortgage + $150,000 LOC
• Renovation drawdowns:
  • Month 1: Kitchen $45,000
  • Month 3: Bathroom $32,000
  • Month 5: Extension $73,000
• After renovation valuation: $850,000
• Refinance to standard loan, close LOC

4. High-Income Earners with Variable Expenses

Use case: Managing large, irregular expenses.

Example:

• Professional earning $250,000/year
• Sets up $300,000 LOC
• Uses for:
  • Tax bills (draw $80K, repay when bonus arrives)
  • School fees (draw $40K per semester)
  • Investment opportunities (draw as needed)
• Repays from salary and bonuses throughout year

Costs and Fees

Interest Rates

Typical LOC rates (2025):

• Variable rate LOC: 6.8-7.8% p.a.
• Premium LOC products: 6.5-7.0% p.a. (large limits, high-income borrowers)
• Basic LOC: 7.5-8.5% p.a.

Comparison:

• Standard variable home loan: 5.9-6.4% p.a.
• Premium: 0.9-1.9% p.a.

Establishment Fees

• Application fee: $500-$1,500
• Valuation: $300-$800
• Legal fees: $800-$1,500
• Total upfront costs: $1,600-$3,800

Ongoing Fees

• Annual fee: $300-$800/year
• Monthly account fee: $15-$40/month ($180-$480/year)
• Drawdown fee: $0-$50 per transaction (varies by lender)
• Total annual fees: $480-$1,280/year

Comparison to Standard Loan

$500,000 LOC costs per year:

• Interest @ 7.2%: $36,000 (on full draw)
• Annual fee: $395
• Monthly fees: $300
• Total: $36,695/year

$500,000 standard loan costs per year:

• Interest @ 5.9%: $29,500
• Annual fee: $0
• Monthly fees: $0
• Total: $29,500/year

Extra cost of LOC: $7,195/year

Risks and Downsides

1. Higher Interest Rates

LOCs are consistently 0.5-2.0% more expensive than standard loans.

Impact over time:

• $400,000 LOC @ 7.2% for 10 years: $360,000 interest (interest-only)
• $400,000 standard loan @ 5.9% for 10 years: $295,000 interest (interest-only)
• Extra cost: $65,000 over 10 years

2. No Forced Principal Repayment

Interest-only LOCs don't force you to pay down principal.

Risk:

• Borrow $300,000 in 2020
• Make interest-only repayments for 10 years
• 2030: Still owe $300,000
• No wealth building unless you discipline yourself to make principal repayments

3. Variable Rates Only

LOCs don't offer fixed rate options.

Example:

• 2025: LOC rate 7.0%
• Interest rate rise: +1.5% over 2 years
• 2027: LOC rate 8.5%
• $500,000 LOC: Interest increases from $35,000 to $42,500/year

No protection from rate rises.

4. Temptation to Overborrow

Easy access to funds can lead to poor financial decisions.

Scenario:

• Approved LOC: $500,000
• Draw for investment: $200,000 (planned)
• Draw for new car: $95,000 (unplanned)
• Draw for holiday: $18,000 (unplanned)
• Balance: $313,000
• Paying 7.2% interest on a car and holiday (terrible financial decision)

5. Can Be Called In

Lenders can reduce or cancel LOC limits if:

• Your income drops significantly
• Property value falls
• You miss repayments
• Lender changes credit policy

Example:

• LOC limit: $600,000, drawn: $200,000
• Property value drops 15% (recession)
• Lender revalues property, reduces limit to $400,000
• No impact (you're only using $200,000)
• But you can't draw the remaining $400,000 you were planning on

Tax Implications

Investment and Business Use

Interest is tax-deductible if funds are used for income-producing purposes.

Example:

• LOC balance: $350,000
• Used for:
  • Investment property deposit: $250,000 (deductible)
  • Personal car: $80,000 (not deductible)
  • Business equipment: $20,000 (deductible)

Tax calculation:

• Total interest: $25,200 @ 7.2%
• Deductible portion: ($270K / $350K) × $25,200 = $19,440
• Tax benefit @ 39% rate: $7,582

Critical: Keep detailed records and separate statements for investment vs personal use.

Non-Deductible Personal Use

No tax benefits if used for personal expenses (home renovations for owner-occupied property, cars, holidays).

Example:

• LOC used for home renovations: $180,000
• Interest: $12,960/year @ 7.2%
• No tax deduction (owner-occupied property)
• Effective cost: Full $12,960/year

When to Use a Line of Credit

Good Use Cases

1. Investment property deposits (short-term)

• Draw for deposit
• Settle investment property within 3 months
• Refinance investment property (90% LVR)
• Repay LOC from refinance proceeds
• Time on LOC: 3-6 months, manageable interest cost

2. Business working capital

• Seasonal businesses with cash flow peaks/valleys
• Draw during slow months, repay during busy periods
• Cheaper than business overdrafts or credit cards

3. Short-term renovation funding

• Fund renovation over 6-12 months
• Revalue property post-renovation
• Refinance to standard loan based on new higher value
• Time on LOC: 6-12 months

Poor Use Cases

1. Long-term borrowing

• Using LOC as permanent debt (10+ years)
• Paying 1-2% premium in perpetuity
• Better option: Refinance to standard loan after 6-12 months

2. Lifestyle expenses

• Cars, holidays, furniture
• No income-producing benefit
• High interest, no tax deduction
• Better option: Save cash or use low-rate personal loan

3. Speculative investments

• Shares, crypto, risky ventures
• If investment fails, still owe full LOC balance
• Risk: Property at stake if you can't repay

Alternatives to Lines of Credit

1. Offset Account with Redraw

How it works:

• Standard home loan with offset account
• Park savings in offset (reduces interest)
• Redraw facility lets you access extra repayments

Comparison to LOC:

• Lower interest rate (5.9% vs 7.2%)
• Less flexible (redraw approval may be required)
• No annual fees typically

Example:

• $600,000 loan with $100,000 offset
• Effective loan: $500,000
• Want $50,000 for investment: Withdraw from offset
• Cost: 5.9% on extra $50,000 borrowed vs 7.2% on LOC

2. Split Loan

How it works:

• Split loan into fixed and variable portions
• Use variable portion with redraw as pseudo-LOC

Example:

• $700,000 total loan
• $500,000 fixed @ 5.5% (stability)
• $200,000 variable @ 6.2% (flexibility with redraw)

3. Cash-Out Refinance

How it works:

• Refinance existing loan to higher amount
• Access equity as cash
• Standard loan rates (cheaper than LOC)

Example:

• Current loan: $450,000
• Property value: $800,000
• Refinance to: $600,000 (75% LVR)
• Cash out: $150,000
• Rate: 5.9% (vs 7.2% for LOC)
• Save 1.3% interest

Downside: Can only do once (can't re-borrow if you repay).

Setting Up a Line of Credit

Step 1: Assess Equity

Calculate available equity:

• Property value: $1,000,000
• Existing mortgage: $300,000
• Usable equity (80% LVR): $800,000 - $300,000 = $500,000
• Maximum LOC: $500,000

Step 2: Determine Required Limit

Don't max out—borrow what you need plus 20% buffer.

Example:

• Planned use: Investment property deposit $180,000
• Buffer: $40,000
• Apply for: $220,000 LOC

Step 3: Compare Lenders

Key comparison factors:

• Interest rate (6.5-8.0% p.a.)
• Annual fees ($0-$800)
• Drawdown fees ($0-$50 per transaction)
• Minimum draw amounts ($5,000-$10,000)
• Redraw penalties
• Loan reduction flexibility

Speak to NIK Finance broker to compare LOC products across 100+ lenders.

Step 4: Apply and Settle

Application requirements:

• Income verification (payslips, tax returns)
• Property valuation
• Statement of assets and liabilities
• Intended use of funds

Timeline:

• Application: Week 1-2
• Valuation: Week 2-3
• Approval: Week 3-4
• Settlement: Week 4-6

Final Thoughts

Lines of credit are powerful tools for sophisticated borrowers who need flexible access to property equity—but they're not for everyone.

When LOC makes sense:

• High income ($150K+) with strong financial discipline
• Short-term funding needs (3-12 months)
• Investment or business use (tax-deductible interest)
• Clear strategy to repay or refinance to cheaper loan

When to avoid LOC:

• Long-term borrowing (use standard loan instead)
• Lifestyle expenses (save cash instead)
• Low income or irregular cash flow (risk of default)
• Poor financial discipline (easy to overborrow)

Typical successful LOC strategy:

• Set up $300,000 LOC against home equity
• Draw $200,000 for investment property deposit
• Investment property settles in 3 months
• Refinance investment at 90% LVR
• Repay $200,000 to LOC
• Keep LOC open for next opportunity (pay annual fee on undrawn facility)
• Cost: 3 months interest (~$3,600) vs value of securing property early (could appreciate $20K-$40K)

Key principles:

• Use for short-term needs only (under 12 months)
• Refinance to standard loan if balance will be long-term
• Track usage meticulously (especially for tax purposes)
• Don't use full approved limit (leave buffer)
• Have clear repayment plan before drawing funds

A line of credit can be a smart tool for investors and business owners—but only if used strategically with clear purpose and discipline. Speak to a NIK Finance broker to determine if a LOC or a standard loan with offset/redraw better suits your needs.