Line of credit loans and home loans with redraw
This fact sheet is for information only. It is recommended that you get legal advice about your situation. See the Fact Sheet: Getting Help.
Shari and Peter had been shopping around for a home loan. They saw an advertisement for a loan that claimed they could save “thousands of dollars” on their home loan. They went to the bank and signed up. They both paid their salary into the loan and withdrew money when needed using a credit card to pay expenses. Four years later, Shari and Peter decided to separate. By this time, Shari and Peter had made around $10,000 in additional repayments to their home loan.
Peter moved out and used his credit card to pay for additional expenses and a car for himself. Next time Shari checked the home loan balance, there were no additional funds left in the home loan. Shari asked Peter to return the money and he said “no”. Shari went to the bank to try and stop Peter taking money in the future only to be told that she could not stop him.
This Fact Sheet covers the problems co-borrowers may have with line of credit loans and loans with redraw. It should be read with Fact Sheet: Before you borrow money and Fact Sheet: Getting a loan with someone else.
Line of credit loans and loans with redraw
Line of credit loans and home loan redraw have proved to be very useful for many consumers. One enormous advantage with redraw is that you can place your savings in your home loan, save on interest costs and be able to withdraw that money if needed.
The disadvantages of redraw and line of credit loans are that redraw funds are very tempting (to spend). In effect, most home loans now operate like an overdraft account and it is easy to end up with no additional payments made, or in the case of line of credit loans, find that your loan is not reducing at all.
Another disadvantage is that in most loans any co-borrower can withdraw the available loan funds without the consent of the other co-borrower. In some cases, this means your co-borrower can just take your savings that you had put into the loan account. Although on some loans you can specify that the signatures of both borrowers are required to access loan funds, on other loans this is not possible. This problem and possible solutions will be discussed in detail below.
Line of Credit Loans
Line of credit loans are any loan with a fixed limit (the amount of funds you can borrow) and you are able to withdraw funds up to this limit. A fixed limit will not change unless you and the lender agree to change it. You are usually required to make payments to at least cover the interest and fees on the loan. Some examples of line of credit loans are credit cards, home equity loans, overdraft accounts.
Home equity loans have a fixed limit, which does not change and you have to make repayments to cover the interest. The loan is usually reviewed every 3-5 years. This is because the lender wants to monitor your ability to repay the loan. This type of loan is usually sold to consumers who have a small home loan on a house that is now worth a lot more than the home loan. The idea being that you get a bigger loan so you can buy things like an investment property, shares, home renovations or any other personal purpose.
BE VERY CAREFUL OF LINE OF CREDIT LOANS THAT ARE “ON DEMAND FACILITIES”. THIS TYPE OF FACILTY CAN BE CALLED UP FOR PAYMENT AT ANY TIME – YOU DON’T NEED TO BE IN DEFAULT. FOR THIS REASON THIS TYPE OF LOAN IS RISKY AND SHOULD BE AVOIDED.
Home Loans with redraw
Most home loans now come with the option of redraw. This means that you can access any additional funds you have paid into the home loan. This type of loan is different from a line of credit loan, as the limit is not fixed. The limit on the loan decreases each month by the amount of your scheduled repayments.
For example, you borrow $100,000 and your repayments are $500 a month. So one month into the home loan your limit will be $99,500. If you had paid $1000 instead of $500 as your repayment you should have $500 available to redraw.
The advantage of this type of loan over a line of credit loan is that the loan will eventually be repaid. It is only possible to withdraw additional repayments and not all funds up to the original limit.
Traps for co-borrowers with line of credit loans and redraw
When you are considering getting the loan, think carefully about how you want access to the available funds in the loan set up. Some lenders allow for you to set up the redraw with specific instructions that both borrowers must authorise the access of available funds. This is becoming increasingly uncommon. In most cases, it will be either you accept the condition that either borrower can access the funds or don’t use this feature (redraw) or this type of loan (line of credit).
So what can you do?
(a) Consider not using redraw or line of credit loans if you have any concerns about your co-borrower accessing funds. This may mean you can get a more basic loan and save money on interest, as you do not need redraw.
(b) If you want to use redraw as an option, ask whether:
(i) The redraw can be set up so both of you have to agree and authorise the withdrawal of funds;
(ii) If this is not possible, ask how can the redraw option can be cancelled. If it can be cancelled, check that just one borrower can cancel it. This way, if you suspect the co-borrower is going to access the funds you can cancel the redraw option in writing. This is not as effective as you authorising each redraw with your co-borrower because the borrower may redraw the money before you cancel the redraw.
(c) If none of the above options are available, consider getting the loan with a lender where you do have these options.
(d) Take care: Line of credit loans do not usually have the option of cancelling access or requiring both borrowers to authorise withdrawals! So think carefully about whether this type of loan is appropriate for you. Remember, for most consumers a home loan with redraw will be flexible enough to deposit and redraw money cheaply and easily.
I already have a Home Loan with redraw or a Line of Credit Loan and I am worried about my co-borrower accessing the available funds
Home loan with redraw: Check with your lender about whether you can cancel the redraw facility or change the redraw facility so both of you have to agree to redraws of available money. If you are worried write a letter stating that you want the redraw facility cancelled.
Line of credit loans: Check as above.
You can write to the lender and ask them to “stop” the account (this means both of you can no longer access any available funds) and that you will not be liable for any further withdrawals of available funds. The lender does not have to take any action on this, although it may assist later in a dispute to show the lender acted inappropriately. Lenders do in some circumstances agree to put a “stop” on the account for you.
Get legal advice! If the co-borrower is living with you or you are married you should also get family law advice.
Need some more help? See Fact Sheet: Getting Help for a list of additional resources.
Lat Updated: 4/7/2013