Can Your Line of Credit Disappear?
In Australia, lines of credit have been a flexible way of people
gaining access to funds secured by their own homes. But what happens when a
lender cancels your line of credit, and what you may do to avoid this from
happening.
What is a Line of Credit?
A line of credit may allow you to access the equity within you home to
borrow for other reasons at home loan rates. The equity that you have is simply
the difference between what
what your home is worth and what you owe on it.
Hopefully, the value of your home will increase over the years, so that even if
you have not paid off significant amount of the loan
your equity and real worth of the home has increased.
While lines of credit may be an effective way of consolidating your debts at low
interest rates, they may also lead you into paying little off the principal of
the loan or even going backwards.
Remember, every time you access your line of credit for a new car, holiday etc,
you are wearing down the equity in your own home.
Some Reasons why a Line of Credit May Be Revoked
1. You Weren't Truthful in Your Application
If you didn't fully disclose all relevant financial details to the lender
that would affect their decision to lend you the money, they can certainly take
away the facility.
Often people inflate the value of the property or their ability to repay the
loan via personal financial circumstances. If these misrepresentations are
revealed, the line of
credit may be revoked immediately.
2. You Exceeded Your Credit Limit
It seems the temptation of having easy access to loads of cash is too much
for many borrowers. Some people simply can't control their spending and will
need to have their
repayments altered so that they are easy to meet, or in some unfortunate
situations, the line of credit may be withdrawn altogether.
3. Your Circumstances Dramatically Change
Nearly all loan documents insist that you inform the lender when your
financial situation affect your ability to repay the loan. In extreme cases,
this may relate to
bankruptcy, imprisonment or death of the main provider. If you don't inform them
promptly of these circumstances, they (the lender) can commence cancellation of
your loan.
Common Terms & Conditions
A common clause in many loan documents reads something like:
"We may refuse to provide further credit at any time without prior notice to
you. We may also reduce or cancel the credit limit at any time without notice to
you.
If we cancel the credit limit we may ask to pay the money owing in full
immediately."
What to do if Your Line of Credit is Cancelled
In the unlikely event that a lender revokes a line of credit, there are 3
options depending on why the loan was revoked.
1. Convert the line of credit to a standard into a
standard loan.
This is the best option if you can meet the loan criteria, especially
if you can get the lender to waive establishment fees and termination costs.
2. Refinance with another Lender.
This option may be difficult if not impossible dependant again on
your situation. On the other hand, the financial market is constantly changing
and new products may arise that suit your needs
3. Dispose of the asset used as the security - your
home
This is clearly the worst option and the scenario is usually when
mortgage refinancing isn't possible because the value of your home dropped
significantly and you have used up all the equity available through your line of
credit before the facility was withdrawn. You then would have to look for a
lender that will lend you more than your home is worth.
As this is extremely unlikely, you would have to have a
fire sale of your property to clear most of the debt.
In brief
Knowing the terms and conditions of lines of credit is vitally important,
especially when the stakes involve the roof over your head. Knowing where you
stand before entering
such an agreement is a must, and any uncertainties must be discussed in full
before proceeding. Lines of credit may be a powerful tool in your financial
health, but like any
loan, restraint and discipline should never be abandoned in pursuit of
temptation.
Debt relief contacts
Financial Ombudsman Service, 1300 780 808
Credit Ombudsman Service, 1800 138 422
Credit & Debt Hotline, 1800 808 488
Financial Counsellors
Financial counsellors offer a free and independent service to help you
assess your options if you’re having trouble managing debt. Google "Financial
Counsellors" or "Free Financial Counselling"
including your locality or capital city to find a Financial Counsellor in your
area.
Useful websites
Financial Counsellors Association of NSW http://www.financialcounsellors.asn.au
Wesley Mission http://www.wesleymission.org.au/
Centrelink http://www.centrelink.gov.au/
Consumer Credit Legal Centre http://www.cclcnsw.org.au/
Insolvency and Trustee Service Australia http://www.itsa.gov.au/
Refinance your loans
See our
article on Mortgage Refinancing
.
Last Resort - Bankruptcy
You can get relief from all of your debts by going bankrupt, but this is
really the very last resort. This will usually mean that you are bankrupt of a
period of 3 years. You will be very much restricted by what you can own,
anything of real financial worth such as an inheritance will go straight to your
creditors. You will have to pay 50% of your income above $41,250 and more than
this if you have dependants. Another disadvantage is that you can't have
employment which requires the handling of money or require a licence, and you will require permission from
your trustee if you want to travel. If your require more information, visit
www.itsa.gov.au.
Our Top Ten Line of Credit Rates in Australia
Institution Product Name Rate
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*Caution: The information contained on this website
only has
general financial advice. Consult your financial advisor for any specific financial advice.
This will assist in
determining your own situation and
specific financial requirements
