Plz explain LOC for a newbee

Hi Everyone,

I have read the bank websites. And spoken to people at the banks. But still don't see why people use LOC. Can someone please tell m the advantage of LOC over a normal loan? I beileve that you have to pay the credit back, right?

And how long do you have to have a loan for before they will do a vaulation and give you a LOC?

Thanks in advance
 
Most lenders will only do LOC at 80%, although there are some left who will do it for 90% of the properties value.
Basically LOC are a little bit like a credit card, you only need to make the interest payments on the money drawn that month. Some people use them as in case of emergency money, some people use them for paying estate agents deposits before they draw the loan for their next purchase.
The same effect can be had from an interest only loan with 100% offset, however many lenders dont offer 100% offset, or have other restrictions and therefore people need to use their usually a little bit more expensive LOC product.
 
For me, the advantages of a LOC are the flexibility and immediate availability of funds.
IO for the life of loan.
Easy to gain access to equity by getting a reval and upping my credit limit.
Can quarantine personal expenditure, and individual IP expenses, by using sub accounts.
 
Its good also if you have a loan with 1 bank and want to seek a loan for another IP using a 2nd bank.

The first bank will want to keeep you around 80% with the LOC and the 2nd lender will want you at 80% also.

You can then draw down the first IP using a LOC and using it to pay the deposit for the 2nd lender.

The CBA offset account is shocking and very restricted so i use my LOC for all my direct debits, etc so i never get overdrawn fees, Then my my weekly pay gets split up and my play money gets put into 1 account and the rest goes into my LOC.
 
One LOC -ve

Quite a few lenders have "repayable on demand" or the like clauses.............

Revolvers are great for capping interest and for purely investment related transactions, but can be a challeng where used for owner occ for a number of reasons.

ta
rolf
 
ok still not quite with yas there.

Ok, so if I had $50k equity, and I wanted to use that to buy a car for example, what would be my repayments? How would it affect my loan? And how would it affect the IP?

Thanks for the replies guys
 
If you had 50K equity you would need to go to get a loan.
If the loan was a line of credit, the repayments would be based on how much of the loan you used times the interest rate divided by 365, times by the amount of days in the repayment perios, usually a month.
Its exactly the same as a normal loan it that respect. If the equity was drawn from your IP or your PPOR, that makes no diference.
If you decide to pay back a lump sum into the LOC, the repayment will be less the following month, based on the sums above. As they would if you decided to then increase, or draw out some of the 50k later. The repayments change depending on the balance, like the repayments on a credit card.

LOC were sold a lot when I started Broking 5 years ago or so, and many of the people I saw who were sold them as a way to pay out their O/O loans early got very confused and wanted to change back to a normal loan.

A LOC will not counter act the economic law that he who spends all that he earns will have nothing left at the end of the day.
 
(now i feel dumb coz Im still no getting it)

ok so,

50,000 * 5% / 365 * 30 = $1.02million

I'm definitly missing something here...

a loan of $50k over 5 years @ 5% interest = $943.5 per month

this one seems more accurate, is it? And can you get a LOC were you only pay back interest? Mos likely not, but I'm curious.

Thanks for the help guys :). Its much more easier in this forum then talking to the people at the banks...
 
this one seems more accurate, is it? And can you get a LOC were you only pay back interest? Mos likely not, but I'm curious.

Thanks for the help guys :). Its much more easier in this forum then talking to the people at the banks...

Does it make it easier for you if we just called it a "redraw" (although technically not the same)?

Let's start backwards.

Say you had a loan for $50k @ 5% interest.

You paid interest on the $50k as normal ($50,000 x 5% / 365) = $6.84 per day.

You had some cash so you paid off $30k. Now you only pay interest on the $20k owing ($20,000 x 5% / 365) = $2.73 per day. So far so good?

You suddenly have a need for cash - say $5k.

You withdraw $5k from the loan, so the loan is now at $25k. You now pay interest on the $25k. ($25,000 x 5% / 365) = $3.42

You can still withdraw up to $25k in cash (because that is what is left of $30k you paid off earlier)

Does that make things easier or worse?

Cheers,

The Y-man
 
(now i feel dumb coz Im still no getting it)

ok so,

50,000 * 5% / 365 * 30 = $1.02million

I'm definitly missing something here...

a loan of $50k over 5 years @ 5% interest = $943.5 per month

this one seems more accurate, is it? And can you get a LOC were you only pay back interest? Mos likely not, but I'm curious.


LOC = you only need to pay the interest - you can pay back the principle at any time - not monthly as in your calcs

Thanks for the help guys :). Its much more easier in this forum then talking to the people at the banks...


Your maths are wrong!

If you get a LOC for 50k (and draw on the full $50k) and the interest rates are 5% then to calculate your repayments:

50,000 x 5% = $2,500 pa = $208.33 Per Month

LOC is like a credit card - all you pay back is the interest - you don't need to pay down the principle.


If you want to calculate the amount of interest you would pay over 30 years then multiply $2500 x 30 = $75,000 in interest (remember you still have the $50k balance on the LOC)
 
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