The line of credit loans in Australia allow to use credit card for purchases during the interest free period.
The bulk of wages/salaries is then transferred to the home loan account.
Theoretically, this suppose to reduce the interest on the home loan.
The credit card is used as a temporary lender while the home loan is reduced by large monthly deposits.
The credit card will be paid off each month from the line of credit. This way the home loan is reduced by borrowing money from the line of credit loans. This is an offset saving system based on a credit card facility. It has some merits but for majority of income earners it is a flop.
This depends on the amount of deposits into your home loan plus the ability to pay off the line of credit.
If the extra contributions towards the mortgage are minimal then this scheme is undesirable.
However, for those who earn large sums of money occasionally, the system does work. The commission earners such as agents often use the line of credit loans in Australia to sustain mortgage and the living expenses.
For those who earn lesser amounts but on the regular basis, the line of credit loans in Australia is not recommended. In fact in this case, the borrowers will end up worse off.
The reason is very simple. The line of credits loans carries higher interest rates than the home loan. You have to make really significant sacrifices to your extra deposits in order to outweigh the shortcomings of the line of credit. For most people this is not feasible.
For example, a loan of 200K will cost +/- $1500 per month (interest plus principle). To reduce this loan to $1300, the borrower needs to sacrifice $2000 a month for an entire year. The benefit is only +/-200 per month. Yes, these are good long term savings but there is an immediate hardship for the next 12 months. In most cases, average household cannot apply this scheme.
People with fluctuating income are the best suited for the line of credit loans in Australia.
They need flexibility, in which banks provide funds irrespective of the borrower's ability to repay.
This way the large but irregular payments will cover the credit line but mortgage is secured at all times. Thus, the line of credit loans in Australia will charge higher interest but ensures that house is in the hands of the owner.
Extreme care needs to be exercised with this type of loan. Irregular or fluctuating high wages still need to be available for large deposits. Failing to pay this loan for a long time will result in an out of control debt.