LINE OF CREDIT
For those people who have discipline but also want flexibility and access to credit if required, the line of credit is a great option.
As with a floating mortgage the line of credit is often combined with a fixed mortgage, however unlike the floating mortgage a line of credit is effectively combining part or all of our mortgage with our everyday banking.
In this way our salary or wage payments are credited to our line of credit account on payday, and so the balance of this part of the mortgage is immediately reduced - and stays that way until we start increasing the balance again by our everyday payments.
If over each pay period we use less and less of our salary or wage payment, the balance of the line of credit will reduce accordingly, without having to commit to lump sum payments into a separate mortgage account.
Pitfalls and benefits of a flexible Line of Credit / Revolving Mortgage
This portion of our mortgage is often called a “flexible” line of credit because we are able to draw down the difference between the current balance and the credit limit at any time without reference to our bank for approval.
For some people, it can be very tempting to make purchases as often as we see something we like as you don't have to worry about making the mortgage payment separately for this portion of your loan, and in this way we can be defeating that important mortgage repayment goal we have set ourselves.
This is why the line of credit is for those with good financial discipline. All purchases can go on a credit card with a long interest free period, thus keeping your daily purchases away from your mortgage account for as long as possible. Setting up an automatic payment for the credit card assures there is never any interest on that portion of your spending.
In this way, your income directly reduces your mortgage interest total immediately, and your expenditures are held aside interest free for the term of your credit card, reducing your monthly interest total on your mortgage. As long as you carefully manage your spending, this type of mortgage can be a very effective method of paying off your mortgage quickly.
The line of credit can be very worthwhile for the occasional financial emergency that we might find ourselves in, and it can be particularly useful for those who maybe self employed with income that can fluctuate.