# Line of Credit Calculator

#### Greg Loucos

From: Greg Loucos

Does anyone on the forum have or know of a calculator to calculate the impact of using a Line of Credit in reducing a loan.

Regards

Greg

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##### Guest
Reply: 1
From: Ethan Smith

Hello,

Yes, the "Your mortgage" magazine website has a whole host of calculators, including one for a line of credit I think. The website is:

www.yourmortagage.com.au

Ethan

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#### Greg Loucos

Reply: 1.1
From: Greg Loucos

Thanks Ethan, this is what I was after.

Regards

Greg

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#### Rolf Latham

Reply: 1.1.1
From: Rolf Latham

Hi Greg

Calculators of various sorts of this type need to be treated with caution, not because they are wrong but because you need to actually see whether the basic assumptions apply to you.

Generally speaking on lower incomes and cashflows these products on an off the shelf basis COST you money.

Why ? Because the interest rate of the LOC product is say 6.5 %. The basic loan with that lender may be say 6.0 %.

On a loan balance of 200 000 you will pay on average near 1000 more in interest in the first year. Unless you can continuously park
over 15 000 in that account, the increased rate cost is not even covered.

As with all financial products the bottom line is NOT the bottom line. Do your sums in detail and you might see that many a lender is stretching the truth in their advertising.

Similarly many lenders, especially non bankies encourage you to "compare". Issue is that commonly that comparison is neither fair nor valid comparing budget loans with fully featured offset and or Line of Credit products.

Ta

Rolf

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#### Greg Loucos

Reply: 1.1.1.1
From: Greg Loucos

Rolf

Thanks for the reply.

How do you go about conducting the comparison, do you have a spreadsheet where you can input the details of two products and then determine if one is better than the other?

What is the best way of trying to compare products so as you are comparing apples to apples?

Regards

Greg

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#### Rolf Latham

Reply: 1.1.1.1.1
From: Rolf Latham

Hi Greg

What I normally do is to look at the total cost of the loan over a seven year period for the entire loan amount.

This is similar to the AAPR or average annual percentage rate systems promoted by many non bankies. I look at the entry, ongoing and amortise the early exit fees if there are any.

Be aware though that then you compare a 100 % offset product with a 100 % offset product and not a cut price redraw. Or in your case an LOC with LOC. What the non bankies LOVE to do is to take their cut price loan and then compare it to the rack rate product of the big 4 banks. This is akin to taking a Hyundai Exel and Comaring it to a big family car.

While its a readily simple process it will take you a while to churn through.

The first decision to make is what product you actually need and that will take you some time to churn through. This is where an independent broker can clear the fog. Use their accumulated experience of their client base and their IP to help you select a product style or mix of styles. I suppose what Im saying is to choose a broker, not a product.

There is soooo much variability in the market place and in rates and in product that there is NO systemised method of choosing the right product. Thats because people use it and we all have different expectations, needs and wants.

Ta

Rolf

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#### Greg Loucos

Reply: 1.1.1.1.1.1
From: Greg Loucos

Rolf

Once again thank you for the advice.

My aim is to reduce our loan on the PPOR as quickly as possible and still leave us flexibility in moving ahead with IP purchases.

A LOC seemed to meet the criteria for doing this but as you have mentioned other products might be a better option.

Finding a broker to help decipher the information appears to be my next task.

Regards

Greg

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#### Rolf Latham

Reply: 1.1.1.1.1.1.1
From: Rolf Latham

Hi Greg

Are you likely, as many people try to, retain your home as an IP at some time, or is your PPOR the home of your choice for the next say 10 to 15 years ?

Ta

Rolf

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#### Greg Loucos

Reply: 1.1.1.1.1.1.1.1
From: Greg Loucos

Rolf

The PPOR will be our home for the long term, we also have 1 IP purchased this June.

Regards

Greg

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#### Rolf Latham

Reply: 1.1.1.1.1.1.1.1.1
From: Rolf Latham

Hi Greg

I have a different view to LOCs than do most people. I would generally suggest that a straight 100 % offset account is a more suitable product for the following reasons:

1. Interest rates for these products tend to be a little lower, although Westpac at least has its > 250 k LOC at the same level as its offset accts.

2. You maximise tax deductability when you move out of your PPOR to turn it into an IP.

3. No annual or three yearly reviews

4. Positiive balance of cash growing in you offset acct. What makes you feel better emotionally ? 500 k loan facility with a 400 k balance or 100 k in the offset acct and 500 k loan balance ?

And on and on. LOCs have their place, but often not for PPOrs.

Ta

Rolf

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#### Greg Loucos

Reply: 1.1.1.1.1.1.1.1.1.1
From: Greg Loucos

Rolf

Thanks again.

Will try and sort out a direction to follow with the wife and review my current loan contracts to see if refinancing for the long term will encounter any early pay out penalties, in the long term they may be worth paying to get the structure right.

Regards

Greg

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#### Rolf Latham

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Rolf Latham

Hi Greg

Commonly if you retian your business with your exisitng lender you may find that they will be kinder with regard to early repayment costs.

Ta

Rolf

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