The Line of Credit Myth Busted

Over the last ten years one of the biggest myths of all time has appeared in the financial planning industry: Get a Line of Credit and pay off your home loan in half the time, then invest and cut it down by another half.

Heard this before???

It’s not true – at least it’s not true in the sense that the Line of Credit is what pays off your home loan. So why have a large number of planners jumped on this bandwagon? Because it is a gimmick to get you to use their financial planning services. They prey upon the emotions of those people who wish to pay off their loans faster, and it has been very successful in that respect. Usually at the client’s expense.

The major banks and some of the other smaller institutions then jumped on the same wagon as people began asking for the product or refinancing their loans away from them because they didn’t offer it.

It spiralled into the myth – “Get a Line of Credit and your home will get paid off in record time”.

I’m sure that many of you are using a Line of Credit and are successfully paying down your loan. So why are we saying that this myth is untrue?

It’s simple really, whatever type of loan you have – whether it be a Line of Credit, a Principle and Interest home loan with a 100% offset account, or a basic variable home loan – you will pay the loan off just as quickly. The type of loan that you have is irrelevant; it is the SURPLUS INCOME that resides in the Line of Credit, offset account or as extra payments off the basic variable home loan that is what ACTUALLY makes it work.

In fact, here at Hudson we recommend that unless you are really very good at paying down your loans and not drawing them back up, you should be using the 100% offset loan, or basic variable loan, as a loan payment is always being made which means the loan WILL come down.

The problem with having a Line of Credit at your disposal if you are not extremely well disciplined, is that at the end of each month when the credit card bill comes in, this bill is paid by drawing back off the Line of Credit. Now unless you can make sure that what you spend on your credit card each month does not exceed the amount that would be due as loan payments if you had a normal variable loan, you will be going backwards instead of forwards, and end up owing more on your home loan than when you started!!

Over the years I have seen far too many people get caught in this trap and end up in a spiralling cycle of debt. They are not paying down their home loan debt, and are actually adding to it in the form of a personal loan or two, plus the credit cards that don’t get paid off once there is no available credit left in the Line of Credit. It is a situation that shouldn’t be taken lightly.

So what do we use a Line of Credit for?

We use them to access the extra equity in properties for investment purposes. The reason we use them here is that they are flexible enough to be used to pay for the deposit and costs on property, shares, managed funds etc. Now there are lots of packages out there involving Lines of Credit that can get good interest rates, and it is something you should talk to the Hudson Finance Team about to make sure you are getting the best deal that is right for you and your circumstances.

Book your appointment with the Finance Team by calling us on freecall 1800 804 296 or book online