Transaction Loan (LOC)

A Transaction Loan is generally one of the least discussed Mortgage loans available from any number of Lenders. Yet they are also potentialy the basis of the most effective Mortgage and Debt Reduction loans available in Australia.

A Transaction Loan, also called a "Line Of Credit" Account or "LOC" is fundamentally different to a "normal" Principal and Interest term mortgage in a number of ways.

Firstly, a Transaction Account charges interest on the amount of money actually owed on any given day. Whereas a P&I Mortgage simply put, basically loads all of the interest up over the term of a mortgage, adds it to the principal, then divides the total by the number of months in the loan term.

As a means of reducing a Mortgage Debt, the Transaction Account or LOC mortgage allows you to deposit as much of your income and any other cash straight into the LOC at any time and all funds deposited are immediately deemed to come straight of the loan principal.

So, if a LOC is set up with a Salary Crediting authority; where your employer pays all of your income directly into the LOC and not into a savings, cheque or passbook account, then all of your income offsets completely against the principal of the loan and interest is therefore lower because you are only ever charged interest on the amount of money you actually owe on any given day.

So, a Transaction Account is an "In and Out Account. Money is deposited into the account, thus reducing the debt, and then money can be withdrawn when needed.

Structuring a LOC to maximise Debt Reduction.

Simply moving all of your available income into a LOC will dramatically reduce the interest you have to pay on the loan but you have to be able to live as well. So a Structured Mortgage Reduction System must also incorporate an economical method of accessing the necessary funds for living.

Many lenders and some mortgage brokers will establish a LOC or Transaction Account as a mortgage account for you but they may not necessarily assist in creating the optimal mortgage structure along with it. So it's important to understand that simply having a LOC won't necessarily mean you'll really save money on interest or take any time of the loan term.

A well Structured Mortgage Redution LOC needs to incorporate a means of accessing your funds at little or no cost to you. To do this properly we recommend that the LOC also includes a Nil Interest Visa Account (NIVA), a cheque book, online banking, free ATM access and no ongoing fees and charges.

Attaching a Nil Interest VIsa Card can allow you to access all of the available funds in your Mortgage Redution LOC without the funds actually coming out of the account until the end of the month, or the end of the billing period.

It works just like any normal credit account. The NIVA has a credit limit - usually a maximum of 3% of the value of the entire Mortgage Redution LOC. You utilise the VISA component of the card to access cash and to purchase goods and the funds used are repaid at the end of the billing period (usually the end of the month) without any fees, or interest charges.

Two of the major benefits of a NIVA account on the Mortgage Redution LOC are:

1. Unlike a normal VISA card offered by the lender's, the NIVA credit limit will not be increased by the lender. It will always remain at a maximum of either 3% of the value of the Mortgage Redution LOC, or the limit set by the borrower - upto the 3% value.
   
2. The NIVA will never charge interest on the funds used in the account as the account is cleared back into the Mortgage Redution LOC at the end of each billing period.

What are the draw backs of a Mortgage Redution LOC?

Most people we talk to are after a Mortgage Structure that will allow them to become debt free years sooner, without necessarily paying any more per month to do it. But, it is possible for even the best Mortgage Redution LOC to be used in other ways.

You could well end up still owing the same mortgage debt in 30 years time if you continually re-use all of the funds of the LOC over the whole of the term.

Is that a bad thing?

Not necessarily! Let's look at a scenario for a moment.

Let's assume a family have a Mortgage Redution LOC of $250,000. They actually only owe $175,000 in mortgage debt and the balance of the Mortgage Redution LOC is some of the equity in the property.

The Mortgage Redution LOC only charges interest on the amount of money owed each day and as both partners salary credi all of their incomes into the mortgage their true debt is actually less than the $175,00 we'll use in this scenario.

Using their NIVA card this family does all of their "business" for the month, like grocery and other shopping, paying bills, buying fuel, accessing cash and on average they'll spend $4,000 a month - not ncluding the Mortgage Interest. At the end of the billing period the NIVA is cleared into the Mortgage Redution LOC and their debt rises by the amount they've spent. As long as they don't spend as much as they earn they're almost certian to get out of the Mortgage Debt years sooner.

But, what happens when "Life" happens?

If, as happens to all of us, you need to access more funds than normal, for things like, weddings, renovations, investments, car repairs or replacements, holidays, school fees, anything you can conceive of, you normally have to go further in to debt with by taking out either a personal loan or another credit card.

Each of thes options are very expensive. What other option do we have in this scenario?.

The Mortgage Redution LOC was set up for $250,000 but our debt was only for $175,000. So we have an additional $75,000 we can spend if we have to. And if we do spend it then that $75,000 is charged at the lowest interest rates you'll probably ever get - the Mortgage Redution LOC rate. Let's assume that's a variable rate of 7%.

This family knows that they can cover quite a lot of emergencies with the equity in the Mortgage Redution LOC. It's money they can access, and they'll only ever pay interest on the real amount they spend.

Can they overspend?

Of course they can. But if they've never been real spendthrifts in the past, why would they do it now? But if they had to go further into debt, we know they'd rather do that at home loan rates than at either personal loan rates or at credit card rates. Wouldn't you?

Let's look at this family's worst case scenarios. What happens if they lose their source of income, either through unemployment or illness/injury.

With a standard mortgage, our couple still need to find the money for the mortgage repayment every month, even when there's no money coming in. How stressfull is that thought? Imagine how you would fare if you lost all of your income for 6 months? 12 Months?. Could you survive?

Well, our scenario family have a Mortgage Redution LOC. They owe $175,000 but can access anothe $75,000 if needed. Assume they earn $5,000 a month between them and both find themselves out of work or injured with no income coming in. With the Mortgage Redution LOC, they can simply allow the debt to increase each month rght up to their limit of $225,000.

That's right. They make no repayments as such. The Interest simply gets capitalised (added) to the loan.

This family has access to an additional $75,000 - no questions asked, No forms to fill in. It's there for whatever use they deem important. That's the equivelant of surviving 15 months of unemployment or disability without really impacting dramatically on their lifestyle.

The worst case scenario for them is that their mortgage cost rises from about $1020.00 a month at 7%, before the tragedy to a maximum of $1,458.00 a month 15 months later. Then,once they get over the tragedy and get back to work, it won't take too long before they're back to reducing their debts again.

At Optimal Lifestyle Mortgages, we truly believe that every family or home buyer should have the opportunity to see for themselves just how effective a Mortgage Reduction LOC can be. To find out if this form of Mortgage would benefit you just complete the form below to allow your local Mortgage Reduction Professional to contact you for a no cost, obligation free discussion on your Mortgage Reduction Potential.