All Topics / Finance / How do HELOC work?

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  • Profile photo of wan0151wan0151
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    @wan0151
    Join Date: 2019
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    Hey guys,

    I’m a bit confused about how HELOCs work. Let’s say that I draw out a $300k HELOC and I use it to fund the deposit, stamp duty and other related fees of purchasing an IP (total: $100k). Then I use the remaining amount (300-100= 200k) to pay the monthly repayment and interest on the amount taken out (the HELOC acts as a financial buffer) Once the amount is finished, let’s say in a few years, how does the repayment period of the HELOC work? I can’t seem to find any information about that part of it.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Are you talking about USA finance. That term is not generally used in Aust.

    If you have a LOC here the repayments are generally the outstanding interest each month

    Some lenders allow this to be capitalised though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
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    @wan0151
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    I’m based in Australia so I’m simply referring to a LOC that’s being burrowed against the equity of the home.

    I understand that once an amount has been used up on the LOC, interest is paid on the amount that’s been consumed right? What I mean is once the LOC is drained (all of the money as been used up), how is it repaid? Do I need to get another loan from the bank to pay it off? I’m not sure how the repayment of the LOC works once it’s been depleted.

    Profile photo of TerrywTerryw
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    @terryw
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    once drawn, partially even, interest starts to accrue. Once fully drawn the same thing expect you cannot borrow any further or capitalise the interest

    You would need to repay the interest each month and if you want to repay the loan pay more than the interest. No need for a new loan to repay it.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
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    @wan0151
    Join Date: 2019
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    So for example, let’s say I take out a $300k LOC and I draw out $2k monthly. Once I first draw out $2k, I need to begin paying interest on the money that I draw out. When you say ‘if you want to repay the LOC pay more than the interest’, how much more do I have to pay?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    say the interest is $20, you could repay $20.01 if you wanted to. Generally you will only need to pay the interest, with some lenders and products there is no requirement for that until the limit is reached. Interest will be capitalised.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
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    @wan0151
    Join Date: 2019
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    So if you just pay one more cent than the interest repayment on the amount drawn out of the LOC, that’s the way to repay it? I thought you had to repay the whole amount drawn out. For eg: If you take out a $300k LOC, don’t you have to pay back the whole $300k to the bank? You mentioned that ‘generally you will only need to pay the interest’ but don’t you have to repay the whole $300k principal amount? Could you show me what I’m missing here.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    You will owe the lender the full amount plus interest. But won’t need to pay it all back until the end of the loan term

    If you pay more than the interest you will be reducing the loan amount – but might be able to access it for redraw.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
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    @wan0151
    Join Date: 2019
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    So let’s say I get a $300k LOC and I’ve made all my interest payments and now it’s the end of the loan term and it’s time to pay back the $300k. Wouldn’t I need an additional loan to pay that off? I don’t have $300k of cash. You said earlier I wouldn’t need a new loan as long as I paid a little more than the interest payment required but I’m not seeing how that small extra payment covers the principal.

    Profile photo of TerrywTerryw
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    @terryw
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    if it is the end of the loan term of course you would need to pay it back. This is just a loan like all of loans really.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
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    @wan0151
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    Definitely, thanks. When you said ‘If you pay more than the interest you will be reducing the loan amount – but might be able to access it for redraw.’, do you mean to extend the LOC? or establish a separate redraw facility? Not sure what you mean by redraw.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    redraw means borrow more money, in this case up to the limit – until the loan term ends.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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