Investors shun line-of-credit loans in favour of cheaper alternatives

The appeal of line-of-credit mortgages – traditionally popular among property investors – has declined to levels last seen May 1998, according to the latest ABS Housing Finance figures.

The November figures show that only 3.7% of home loans were revolving line of credit, with just 1,900 of these loans taken out over the month.

Line-of-credit loans peaked at 16.1% of all loans in June 2002, when more than 8,300 of these loans were taken up by borrowers.

The popularity of the products, which act like giant credit cards or bank overdrafts, dropped below 10% of all loans in 2006.

Their recent decline has matched Australian households increasing their savings and deleveraged their balance sheets in the response to the GFC and in the face of more economic uncertainty.

Source: ABS

“It’s certainly speaks to the shift in both the market and consumer behaviour to see the reduction of revolving lines of credit in the home loan market,” says Dean Rushton, chief operating officer of mortgage broker Loan Market.

Rushton says their popularity has declined because borrowers are choosing cheaper products that offer redraw facilities or offset accounts should they need extra money.

“These products are often free of any additional fees,” he says.

“Line-of-credit home loans for residential finance that were more in favour during the early to mid-2000s appear to be headed for the mortgage museum as a result of the GFC,” he says.

“However, the key point here is consumers want to have the one-two punch of having access to additional funds paid and the forced discipline of reducing their loan amount.”

Rushton says the key disadvantage for a revolving credit line is that interest rates were generally 10 to 20 basis points higher.

He says with offset and redraw features borrowers can access an amount up to the amortised rate of their mortgage.

“This type of transaction ensures that borrows do not fall behind on their original repayment schedule,” he says.

Line-of-credit mortgages work in the same way as an overdraft account – they provide an approved limit of borrowings that investors can use piecemeal or all at once, depending on their needs.

Interest is accrued on how much of the loan is used and unlike other mortgages it does not have a fixed loan term.

The products have been popular among investors because they allow them to tap into the equity already built up in their portfolios and use this to fund further property purchases or renovations.

Line-of-credit loans were introduced into Australia in the early 1990s but only started growing in popularity in 1999.