People choose to have a Line of Credit (LOC)
when they want a Variable Rate Loan, secured by a Mortgage over a residential
property, with an approved limit that can be drawn from.
You can access the funds on a need to
basis.
Interest Rates are usually variable and
repayments are interest only.
The
Pro’s:
·Money can be used on a needs
basis and paid back when you can
·Can be a buffer to manage your
investment- like a business overdraft
·Line of Credit is flexible and
can be used for multiple purposes
·Interest is only payable on the
funds drawn
·Some Lines of Credit allow you
to capitalize the interest so that repayments can be deferred to when the
facility has been fully drawn.
·Funds are easy to access via
Debit Card, Cheque, Internet and Phone Banking.
·Rates are lower than Credit
Cards and Personal Loans because it is secured against Property
·Can be "split” or used in
conjunction with other facilities
The
Cons:
·If you are not careful, you can
reduce the equity in your property by using the funds to purchase things that
are not improving your financial position.
·Some of these may have a higher
rate of interest because it is a transactional account
·Sometimes Establishment and
ongoing Management Fees may be higher than for Term Loans.
·Watch your cash flow because
Compounding Interest can erode your Equity
Conclusion
Because
there may be a temptation to access funds in a Line of Credit (LOC) that aren’t
necessarily going to build wealth, a line of credit should be only for
disciplined investors looking topurchase a new property or fund a
renovation to an existing asset – both options are generally likely to see you
add value to your portfolio.
If you’re a business owner
with a mortgage against either your home or the property your business utilises
then lines of credit can be very handy to help manage cash flow and should also
mean that the interest charged is tax deductible (as always, consult your
accountant before establishing any finance facility).
Because there may be
a temptation to access funds in a
Line of Credit (LOC) that aren’t
necessarily going to build wealth, we generally suggest a line of credit for
disciplined investors looking topurchase a new property or fund a
renovation to an existing asset – both options are generally likely to see you
add value to your portfolio.
If you’re a business
owner with a mortgage against either your home or the property your business
utilises then lines of credit can be very handy to help manage cash flow and
should also mean that the interest charged is tax deductible (as always,
consult your accountant before establishing any finance facility).
Jason Gwerder
Friday, 13 May 2016
