As previously discussed, a line of credit is a loan with an established limit on which the borrower can draw at any time without incurring costs, apart from the costs of the interest on the borrowing.
This type of loan was extensively promoted by mortgage debt reduction companies, as a means of reducing the interest payable on the borrower’s home loan and a way to shorten the loan term. It worked by the borrower directing all their income into the line of credit. This meant that the loan amount was reduced by those funds and the amount of interest paid on the loan would be reduced for the period that the funds remained in the loan account.
When this concept was first promoted, the line of credit was the only loan which allowed funds to be deposited and withdrawn without paying fees. Today, most housing loans offer either this feature or they provide the option of a 100 per cent offset account which achieves the same outcome.
It is important to note that a line of credit offers a redraw to the full original approved limit, whereas a home loan only allows full redraw of any additional repayments, the balance must still reduce as per the original agreement.