A line of credit (also called home equity loan or equity access loan) lets you borrow against your property equity up to an approved limit. Draw funds when needed, repay and redraw anytime. This guide explains how lines of credit work and when they make sense.
What is a Line of Credit?
A revolving credit facility secured by your property:
How it works:
- Bank approves credit limit based on equity
- You can draw funds up to the limit
- Interest charged only on drawn amount
- Repay and redraw as needed
- Ongoing access to funds
Similar to a giant credit card secured by your home
Example:
- Home value: $800,000
- Mortgage: $500,000
- Equity: $300,000
- Approved line of credit: $200,000 (keeping LVR at 80%)
Use it like:
- Draw $50,000 for renovation → Owe $50k
- Repay $20,000 → Owe $30k
- Draw $40,000 more → Owe $70k
- Always have access to $200k limit
How Lines of Credit Work
Credit Limit
Based on property equity:
LVR calculation:
- Property value × 80% = Maximum total lending
- Less existing mortgage = Available credit limit
Example:
- Property: $1,000,000
- 80% LVR = $800,000
- Existing mortgage: $600,000
- Credit limit: $200,000
Conservative approach:
- Many lenders: 70-75% max
- Safer: Use 60-70% to allow buffer
Interest Calculation
Interest only on drawn amount:
Month 1:
- Credit limit: $200,000
- Drawn: $50,000
- Interest @ 7% p.a.: $292/month
- Pay interest only
Month 6:
- Drawn increased to $100,000
- Interest: $583/month
If pay back $50k:
- Drawn reduced to $50,000
- Interest: $292/month
No interest charged on un-drawn portion
Repayment Flexibility
Ultimate flexibility:
✅ Draw any amount up to limit ✅ Repay any amount, anytime ✅ No minimum repayment (some lenders) ✅ Interest-only usually ✅ Redraw instantly ✅ No application for each draw
Example usage:
- Month 1: Draw $30k for renovation
- Month 3: Repay $10k
- Month 6: Draw $50k for investment property deposit
- Month 9: Repay $30k
- Always have access to full limit
Line of Credit vs Mortgage
Standard home loan:
- Fixed loan amount
- Principal & interest repayments
- Structured repayment schedule
- Redraw may have limits
- Reducing balance
Line of credit:
- Revolving credit limit
- Interest-only on drawn amount
- Flexible repayment
- Unlimited redraw
- Balance can fluctuate
Line of Credit Rates & Costs 2025
Interest Rates
Typically higher than standard mortgages:
Standard variable home loan: 6.0-6.5% p.a. Line of credit: 6.5-9.0% p.a.
Rate premium: +0.5-2.5% p.a.
Why higher:
- Greater flexibility = more risk for lender
- Interest-only = no principal reduction
- Can redraw infinitely
- Administrative complexity
Comparison:
- $100,000 standard loan @ 6.2%: $516/month (IO)
- $100,000 line of credit @ 7.5%: $625/month
- Extra cost: $109/month ($1,308/year)
Fees & Costs
Upfront:
- Application fee: $0-$800
- Valuation: $300-$800
- Legal fees: $500-$1,500
- Total setup: $1,000-$3,000
Ongoing:
- Annual fee: $200-$500/year (most lenders)
- Monthly account fee: Sometimes
- Transaction fees: Usually none
No fees for:
- Drawing funds
- Repaying funds
- Redrawing
Common Uses for Line of Credit
1. Renovations & Home Improvements
Draw as needed:
Traditional approach:
- Get $80k renovation loan upfront
- Pay interest on full $80k immediately
- Fixed repayment schedule
Line of credit approach:
- $80k limit approved
- Draw $20k for demolition → Pay interest on $20k
- Draw $30k more for materials → Interest on $50k
- Draw remaining as needed
- Only pay for what you've drawn
Benefit: Lower interest during reno
2. Investment Property Deposits
Access equity for next purchase:
Scenario:
- Want to buy $500k investment property
- Need $100k deposit (20%)
- Use LOC for deposit
Process:
- Approve $100k line of credit on current home
- Find investment property
- Draw $100k for deposit
- Purchase investment property
- Rental income helps service LOC interest
Wealth building strategy
3. Debt Consolidation
Pay off high-interest debt:
Example:
- Credit card 1: $15,000 @ 20% = $3,000/year interest
- Credit card 2: $10,000 @ 19% = $1,900/year
- Total: $25,000 @ 19.6% avg = $4,900/year
Use LOC:
- Draw $25,000 from LOC @ 7.5%
- Pay off both cards
- Interest: $1,875/year
- Save: $3,025/year
Plus consolidate to one payment
4. Emergency Fund
Ready access to funds:
Instead of saving $50k in low-interest savings:
- Approve $50k line of credit
- Don't draw unless needed
- No interest if not drawn
- Available instantly if emergency
Use for:
- Medical emergencies
- Car repairs
- Unexpected expenses
- Job loss buffer
5. Business Funding
Self-employed / business owners:
- Fund business expenses
- Manage cash flow gaps
- Purchase inventory
- Bridge payment timing
- Equipment purchases
Tax advantage:
- Interest may be tax deductible (if business purpose)
- Consult accountant
6. Lifestyle & Travel
Funding discretionary spending:
- Extended travel
- Wedding expenses
- Education costs
- Vehicle purchase
- Major purchases
Caution: Easy to over-extend
Line of Credit Pros & Cons
Advantages
✅ Flexibility - Draw and repay as needed ✅ Only pay for what you use - Interest on drawn amount ✅ Quick access - No reapplication needed ✅ Emergency buffer - Peace of mind ✅ Consolidate debts - Lower rate than cards/personal loans ✅ Tax efficient - Interest deductible if investment purpose
Disadvantages
Higher rate - More than standard mortgage Annual fees - $200-500/year Temptation - Easy to overspend No forced repayment - Debt can grow Interest only - Not building equity Variable rate - Can increase Risk to home - Secured by property
Line of Credit Eligibility
Requirements
Basic criteria: ✅ Own property with equity (20%+) ✅ Good credit score (650+) ✅ Stable income ✅ Can service interest payments ✅ LVR under 80% after credit limit
Property:
- Owner-occupied or investment
- Residential property (houses, units)
- Clear title
- Adequate valuation
Serviceability
Can you afford the interest?
Lender assesses:
- Your income
- Existing debts
- Living expenses
- Potential drawdown (often test at full limit)
Example:
- Income: $120,000/year
- Existing mortgage: $3,000/month
- LOC limit: $100,000
- Test at full draw: $750/month @ 9%
- Must prove can service: $3,750/month
Note: Lenders test as if you've drawn the full amount
Credit Score Impact
Application:
- Credit inquiry (may dip score 10-20 points)
Ongoing:
- If managed well: Positive impact
- If over-drawn: Negative impact
- Shows available credit
Best practice:
- Keep utilization under 30%
- $100k limit, don't draw more than $30k consistently
Line of Credit Risks
1. Overspending
Easy access = temptation:
"I'll just draw $10k for vacation" "Another $20k for new car" "Just $5k more for furniture" Suddenly owe $100k+ on discretionary spending
Mitigation:
- Clear purpose for LOC
- Budget and track
- Set personal limit
- Monthly review
2. Interest Rate Risk
Variable rates can rise:
Example:
- Drawn: $150,000 @ 7% = $875/month
- Rates rise to 9% = $1,125/month
- Increase: $250/month ($3,000/year)
Mitigation:
- Budget for rate rises
- Consider fixed if available
- Don't max out limit
3. No Forced Repayment
Interest-only perpetual debt:
Scenario:
- Draw $100,000
- Pay interest only forever
- Never reduce principal
- After 10 years: Still owe $100,000
- Plus paid $70,000+ interest
Mitigation:
- Active repayment plan
- Set reduction goals
- Treat like P&I loan
4. Property Market Risk
If property value falls:
Example:
- Property: $800,000, mortgage + LOC: $640,000 (80%)
- Property falls to $720,000
- LVR now: 89%
- May trigger margin call
- Lender may reduce limit or demand repayment
Mitigation:
- Conservative LVR (70% max)
- Quality property location
- Don't overextend
5. Lifestyle Creep
Living beyond means:
- Access to funds = higher spending
- "I'll repay it later"
- Debt grows unconsciously
- Difficult to reverse
Mitigation:
- Strict budget
- Monthly reconciliation
- Purpose-driven borrowing only
Line of Credit vs Alternatives
vs Offset Account
Offset:
- Savings reduce interest on mortgage
- No debt created
- Full access to savings
- Lower risk
LOC:
- Borrowed funds (debt)
- Higher rate usually
- Flexibility to draw beyond savings
Choose offset if: You have savings to offset
vs Redraw Facility
Redraw:
- Withdraw extra repayments made
- Part of standard home loan
- Usually no fees
- Limited to extra repayments made
LOC:
- Separate credit facility
- Draw up to limit (not just extra payments)
- Higher rate
- More flexibility
Choose redraw if: Standard mortgage sufficient
vs Personal Loan
Personal loan:
- Fixed amount
- Fixed term (3-7 years)
- P&I repayments
- Unsecured: 8-15% p.a.
LOC:
- Revolving credit
- Ongoing access
- Interest only
- Secured: 6.5-9% p.a.
Choose personal loan if: Need discipline of fixed term
vs Reverse Mortgage
LOC:
- Conventional borrowing
- Service interest
- All ages
- Preserve equity
Reverse mortgage:
- For seniors 60+
- No repayments
- Debt compounds
- Reduces equity over time
Different products for different needs
Getting a Line of Credit
Application Process
Timeline: 2-4 weeks
Week 1: Preparation
- Check equity available
- Decide credit limit needed
- Gather documents
- Check credit score
Week 1-2: Application 5. Submit application 6. Provide documents 7. Property valuation ordered
Week 2-3: Assessment 8. Serviceability assessed 9. Credit check 10. Valuation completed 11. Approval decision
Week 3-4: Documentation 12. Sign loan documents 13. Register mortgage (if needed) 14. Account setup 15. Access to funds
Documents Required
Standard documents: ✅ Photo ID ✅ Proof of income (payslips/tax returns) ✅ Bank statements (3-6 months) ✅ Current mortgage statement ✅ Property ownership documents ✅ Asset/liability statement
Purpose:
- What will you use LOC for?
- How will you manage/repay?
Managing Your Line of Credit
Best Practices
1. Have a Purpose
- Use for wealth-building (investments, renovations)
- Not lifestyle inflation
- Clear justification for each draw
2. Track Everything
- Every draw documented
- Purpose recorded
- Repayment plan
- Monthly reconciliation
3. Active Repayment
- Don't just pay interest
- Regular principal reductions
- Set repayment targets
- Aim to keep below 30% utilization
4. Interest Tax Deductibility
- Track investment vs personal use
- Keep separate sub-accounts if possible
- Maintain records for ATO
- Consult accountant
5. Annual Review
- Is LOC still needed?
- Rate still competitive?
- Better products available?
- Consolidate if not using
Structuring for Tax Efficiency
If using for investments:
Split facility:
- LOC 1: Investment purposes only (deductible)
- LOC 2: Personal use (not deductible)
Keep clean records:
- Investment draws → Investment LOC
- Personal draws → Personal LOC or avoid
- Never mix purposes
Maximizes deductibility
Example:
- $100k LOC split:
- $70k Investment LOC (deductible interest)
- $30k Personal LOC (non-deductible)
Tips for Line of Credit Success
Before applying:
- Clear purpose - Know why you need it
- Conservative limit - Not maximum available
- Compare rates - Shop 3+ lenders
- Understand fees - Annual + other costs
- Have repayment plan - Not just interest
After approval: 6. Use wisely - Purpose-driven drawdowns 7. Track usage - Monthly monitoring 8. Active repayment - Reduce principal regularly 9. Avoid lifestyle - Don't fund consumption 10. Review annually - Still best structure?
Tax & accounting: 11. Professional advice - Accountant + financial planner 12. Keep records - Purpose of each draw 13. Split if needed - Investment vs personal 14. Maximize deductions - Follow ATO rules
Risk management: 15. Don't max out - Keep buffer 16. Emergency only - If that's the purpose 17. Rate rise buffer - Can afford 2% increase? 18. Exit strategy - Plan to close/repay eventually
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