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Line of Credit Home vs Standard Variable Home Loans: Which is Better?

Home Loans > Home Loan Articles > Article: Line of Credit Home vs Standard Variable Home Loans: Which is Better?

Many borrowers are unfamiliar with the difference between a standard variable loan and a line of credit home loan. Aside from having completely different terms and conditions, these loans also offer unique advantages and disadvantages to borrowers. It's important for anyone considering applying for a home equity loan to understand the differences between line of credit home loans and standard variable home loans so that they can better assess which type of loan product is right for them.

A standard variable home loan is a loan that borrowers apply for based on the amount of equity available in their home. This type of loan is similar to other loans. The borrower is approved for a specific amount, which he or she will receive as a lump sum, and the loan has a set term and repayment conditions. The interest rate on a standard variable home loan does fluctuate, although fixed rate home loans are also available to some borrowers. Borrowers can use the funds from a standard variable home loan in any way they desire.
A line of credit home loan, on the other hand, is similar to a credit card. The lender will grant the borrower a credit limit based on the amount of available equity in their home, and the funds are secured using the home as collateral. When the borrower needs money, he or she can draw cash against the credit limit by writing a cheque or using a special debit card issued by the lender. With a line of credit home loan, the borrower does not have to draw the entire line of credit at once, but can instead withdraw only the money he or she needs at any given time.

In general, standard variable home loans are ideal when you know exactly how much money you need. Standard variable home loans are frequently used to consolidate debts, pay for a vacation, or make an investment. Line of credit home loans are ideal for situations where you don't know exactly how much money you will need beforehand. Line of credit loans give you the freedom to borrow only the exact amount of money you need, as you need it.

Which Type of Loan Do I Need?

Before you decide to apply for either type of equity loan, you should be well versed in the pros and cons of each type of loan in order to make the best decision for your unique financial situation. Consider these differences between standard variable home loans and line of credit home loans to assess which loan is appropriate for you.

Lump sum versus continuous access to cash:

With a standard home loan, you will receive the entire loan amount in one payment and pay interest on the entire loan. With a line of credit home loan, you can borrow only what you need, as you need it, and pay interest only on the funds you have drawn. As you pay down the balance on a line of credit home loan, the money becomes available again.

Fluctuating versus fixed payments:

Standard home loans have fixed monthly payments, based on the amount of money borrowed, the term of the loan, and the interest rate. Line of credit home loan payments vary based on the amount of money currently drawn. Borrowers can repay the entire balance or make a minimum payment.

Interest rates:

Both line of credit home loans and standard variable home loans traditionally have variable interest rates; however, with a line of credit home loan you only pay interest on the funds you have drawn. With a standard variable home loan, you pay interest on the entire amount of the loan. Fixed rate terms are available for both line of credit home loans and regular equity loans in some circumstances.

Collateral:

Line of credit home loans and standard variable home loans are secured using your home as collateral. Therefore, if you default on the loan payments, you risk losing your home to foreclosure.
Line of credit home loans and standard variable home loans offer unique benefits and disadvantages to borrowers. By arming yourself with information and understanding the differences between these two types of loan products, you will be better able to assess which loan best suits your personal financial situation.

What to do next

Finance Comparison lists a number of highly competitive home loans that you can apply for online. Simply compare rates, terms and apply online.

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