Line of credit mortgages head to the museum

According to the latest data from the Australian Bureau of Statistics, the amount of Australian home owners drawing upon revolving lines of credit for their mortgage has fallen to a 13 year low.

In November, 2011, only 3.7 per cent of home loans were revolving line of credit – the lowest number since May 1998 – well down on the 10.2 per cent recorded in December 2005.

“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,” Loan Market Group’s chief operating officer Dean Rushton said.

“Consumers are using other products with redraw facilities or offset accounts should they need extra money. These products are often free of any additional fees.

“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.”

Mr Rushton said the key disadvantage for a revolving credit line is that interest rates were generally 10-20 basis points higher. He said with offset and redraw features, borrowers can access an amount up to the amortized rate of their mortgage.

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

“In most cases, access to additional funds is available without adding to your loan term or repayments.  It certainly speaks about the shift in both the market and consumer behaviour to see the reduction of revolving lines of credit in the home loan market.”