Line of Credit Equity Loan

Pros

The main benefit of the LOC is its flexibility and because of this, it is often used by investors. Money can be used as needed and paid back in a flexible manner without structured minimum principle and interest repayments. The minimum required is the interest on the outstanding principal

Cons

The main disadvantages of the LOC is the premium (ie a higher interest rate) you pay for the provision of the significant flexibility that the facility provides. Also, bear in mind:

• You can make repayments as you see fit - interest only, regular principal reductions on top of the interest payments, larger lump-sum reductions etc.
• As long as the balance doesn't exceed the approved limit, you are free to draw from and manage your LOC funds however you want. For example, if you are using your LOC to fund shares, you may sell some of your shares, deposit the proceeds into the LOC and then draw the funds out again to purchase other shares.
• As well as the funding account, you can also use the LOC as the operating account for your investment. This saves having an extra account to manage. For example, if you had used the proceeds to purchase an investment property you could also use it to manage the property. Rents could be deposited directly to the LOC and then payments for such things as insurance, rates, repairs etc could come out of the LOC. When the time comes to do your tax return, all the financial transactions relating to the investment are thereby on one set of statements.
• Since it is secured by residential property, the interest rate is less than business loans, credit cards or personal loans

• The variable interest rate applies, leaving you open to the risk of interest rate increases.
• If the LOC is being used for your principal residence, it requires discipline to ensure that over time the principle/balance of the loans is reduced. Having a minimum interest only repayment does not require the borrower to reduce the principal (though some lenders do after a certain term)
• If you run a number of your investments through the one facility, over a longer period of time it can become difficult to align the interest paid against each investment.
• If there is equity within the facility, the temptation might exist to draw funds out for personal purposes in the hope that they will be repaid down the track. Apart from the obvious risks with this kind of decision, it may also create significant confusion when it comes time to do your tax return.