Terminology - LOC vs Redraw

Terminology

Hi Ya'll

I am just a little confused with lending terminology.

What is the essential difference between LOC and Redraw style methods of accessing the equity in an existing property?
Is a LOC like a seperate loan altogether secured by your equity (and your existing loan and LOC are effectively stapled together) -- whereas a Redraw is the same loan just with more pulled out?

Any cost, tax advantages, rate difference, other benefits/cons for one method over the other?
 
Redraw facilities are usually associated with P&I loans. If you are currently ahead on your repayments then you can "redraw" from your P&I loan up to the amount you are in advance. The bank essentially "knows" what your loan balance should be on any given date, and if your outstanding balance is lower than this, the difference is available as redraw.

A LOC facility is an interest only loan where your only requirement as a minimum is to pay the interest.

P&I loans require you to make a minimum payment that includes a component which reduces the principal owing. With redraw a bank would not permit you to redraw more $ that would you prevent you from completing the loan in its normal term (eg. 25 years or whatever).

An LOC has no such requirement, meaning you can potentially take out an LOC for $100000 and still owe $100000 after 25 years.
 
Hi KM

Thats a very good explanation

AND be aware of some products marketed as lines of credit which are actually fully drawn advances on term loans with redraw.

It is a misued generic term


Ta

Rolf
 
OK I get it now -- thanks.

Just one small point.... say you are spot on your scheduled repayments and the property is revalued upwards, so you drawdown some funds from the existing mortgage to use elsewhere -- is that called a redraw if the existing mortgage is a P&I, a LOC if the mortgage is IO, or something else! Just want to understand the industry lingo ;-).

Andrew.
 
HI Andrew

In both cases its probably closer to a refinance or top up depending on the loan used.

Your loan contract would need to be redone everytime you borrow more against increased equity and it doesnt matter if its LOC or term loan

Ta

Rolf
 
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