If you’re an owner-occupier looking to invest in property, a line of credit loan can make the equity in your home work for you.
If you’re looking to invest in property, a line of credit loan could be a great way to leverage the equity in your existing property for a deposit. A home equity loan puts your property up as security to borrow against the equity of your home.
What is equity?
Equity is the difference between the current value of your property and the amount you owe on it. For instance, if your home is worth £300,000 and you owe £200,000 on your mortgage, you have £100,000 in equity.
You build equity in your home in two ways: through making your regular mortgage repayments and through the increase in the value of your property over time. If you’ve been paying your mortgage for a number of years, you will have reduced the principal, or initial amount you borrowed. At the same time, your home may have increased in value. The combination of the increase in value and the reduction in principal adds up to equity. This is known as price appreciation.
How does a line of credit let me access my equity?
A line of credit loan usually allows you to borrow up to 80% of the value of your equity, and this amount is given to you as a credit limit. You can use as much or as little of the credit limit as you like, and you’re only charged interest on the amount you use.
How is a line of credit different from a home equity loan?
A home equity line of credit differs from a home equity loan. A home equity loan allows you to withdraw some or all of the equity in your home, but it is payable as a lump sum. You receive the cash in one go and start to pay back the total loan immediately.
How can I use a line of credit to invest in property?
You can use a line of credit to form the deposit for an investment property. If you have a significant amount of equity in your home, a line of credit loan could potentially account for most or all of your deposit.
A line of credit loan only requires you to pay the interest portion of the loan until you reach your credit limit. This can be a savvy move for property investors, as interest repayments on investment properties are tax deductible.
Changes to UK mortgage interest tax relief
In April 2017, the tax rules on deducting mortgage interest from rental income changed, and the UK government began to phase out this deduction. We’ve included the timetable for these changes below.
|Tax year||Percentage of mortgage interest costs deductible from rental income|
If you don’t use your entire credit limit for a deposit, you can also set aside part of your line of credit for any urgent repairs or maintenance on your investment property. This can help you manage your cash flow.
You’ll most likely need to couple your line of credit with an investment mortgage.
What are the drawbacks of using a line of credit loan to invest in property?
While a line of credit loan can help you invest in property sooner and carries tax advantages, there are some drawbacks.
First, using a line of credit loan to invest in property could potentially see you managing three mortgages. Between your owner-occupier mortgage, the line of credit and an investment loan, using a line of credit for property investment can be cumbersome.
Another drawback of line of credit loans is that you’re using your own home as security. This means that if you run into trouble repaying your line of credit when it’s due, your lender could seek recourse through your property and, in the worst case scenario, could even repossess your home.
What are some tips for using a line of credit for property investment?
Using a line of credit as an effective property investment tool requires some strategy. Here are some tips to keep in mind:
- Try to avoid using your entire credit limit. Leave yourself a buffer so you don’t have to make principal and interest repayments on the line of credit.
- Leaving a buffer also allows you to use your line of credit for repairs and maintenance.
- Devote extra funds to repaying your owner-occupier mortgage. This unlocks more equity and minimises your non-tax deductible debt.
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How do I compare line of credit loans?
Line of credit loans are relatively straightforward products, so the best way to compare them is to analyse the interest rates and fees.
Line of credit loans come with higher interest rates than typical mortgages, and rates can vary substantially from one lender to the next. It’s important to compare to make sure you’re getting the best deal available.
If you’ve been diligent in repaying your mortgage, and if you’ve been lucky enough to see your home grow in value, a line of credit loan could offer a great way to put your equity to work for you. But, as with all financial products, it’s important to compare your options and consider your own financial situation before you make a decision.