To LOC or not to LOC

[possumcreek]

Considering a LOC loan with new lender to put IPs and PPOR into one pot to access equity and flexibility for future purchases (per M. Lomas). Currently equity spread through different loans with same lender. Have to refinance every time want to purchase. Nothing owing on PPOR.

My issues: -the premium cost
-somebody previously on forum saying there's no way they would touch a loan like this?
-what happens with personal expenses when you don't have PPOR loan
-keeping track of your money

According to M.Lomas it's the easist way to build a portfolio
Any comments gratefully accepted.
Thanks PC

[Rolf Latham]

Hiya Poss

There are more underlying issues here that are of "concern" to me than what product you use.

1. By putting all in one pot you are cross collateralising ALL your properties. May not be a problem, my clients' experience suggests otherwise. XColl is a ok for a couple of lowly priced props, but can become a real burden once you have a few more.

2. To access increased equity in the proposed structure you will still have to do a refi or top up everytime something grows.


PLEASE consider finding yourself a good independent broker that knows investment and really grills you about what you want to do in the future.


LOCs are OK for some applications. They are one of my pet hates though, since they have the potential to confuse deductible and non deductible debt. Again, a good broker may be able to come up with a mix of LOCs offset and some fixed rate so as to spread your exposure

Ta

rolf

[possumcreek]

My understanding was that with certain LOC products each separate sub account can be made IO or P&I, as required, the limits of which can be varied (as long as they stay <80% of the total value of the pot) and that even the properties you use as coll. can be transfered if need be. So I was seeing it as a far more flexible way to bank than we currently do.
I realise that 100% offset is popular with the forum but I believe our bank doesn't offer it so I'd be looking at changing lender anyway.

PS how do you highlight previous posters comment in your reply? You know the cute little boxes.

[possumcreek]

Hiya Poss

There are more underlying issues here that are of "concern" to me than what product you use.

1. By putting all in one pot you are cross collateralising ALL your properties. May not be a problem, my clients' experience suggests otherwise. XColl is a ok for a couple of lowly priced props, but can become a real burden once you have a few more.

2. To access increased equity in the proposed structure you will still have to do a refi or top up everytime something grows.


PLEASE consider finding yourself a good independent broker that knows investment and really grills you about what you want to do in the future.


LOCs are OK for some applications. They are one of my pet hates though, since they have the potential to confuse deductible and non deductible debt. Again, a good broker may be able to come up with a mix of LOCs offset and some fixed rate so as to spread your exposure

Ta

rolf


Oh sorry just found the Quote button. HAS THAT BEEN THERE ALL THE TIME!

[Rolf Latham]

Hiya Poss


In any case to access equity growth, a val and (often) a new credit assessment would be required, this is regardless of the product.

LOC products like STG portfolio have their uses, but 10 splits gets damn expensive, like over 1000 a year, something you can easily achieve with 2 splits (or 2 separate loans) and a simple spreadsheet, and 5 minutes a month of data entry.

Just my opinion, people that knowingly promote xcoll of that nature dont have a clue in regard of asset protection. Its ok to lock together a couple of IPs in a trust to say a max of 300 k, or a bit higher if there are special circumstances, but to bundle eveything will involve a very painful and expensive extraction when you are no longer in favour with that lender

ta

rolf

[sbe]

Hi Possum.


Considering a LOC loan with new lender to put IPs and PPOR into one pot to access equity and flexibility for future purchases (per M. Lomas). Currently equity spread through different loans with same lender. Have to refinance every time want to purchase. Nothing owing on PPOR.

A LOC can be a great way of having ready access to funds for more acquisitions. I'm concerned the way you've worded it would be x-coll (ie all properties securing each other) like Rolf said. Avoid this - period. Refinance on every purchase - depends on your situation - if you're drawing equity to purcahse with normal loans, you musn't have any redraw available. LOC's only work if you aren't fully drawn on that anyway....

My issues: -the premium cost
-somebody previously on forum saying there's no way they would touch a loan like this?
-what happens with personal expenses when you don't have PPOR loan
-keeping track of your money

I have a LOC and love it. Means I'm no longer fretting if a payment is late, or I have a 'bad month'. Of course, to state the obvious again, it only works if you're not fully drawn....
I have two accounts - one is personal, one is Investment (pooled). The investment one has a spreadsheet to track the splits between properties.


Important Advice - speak to a Mortgage Broker - but not any old one - one who KNOWS investment properties and structures etc. There's a few on this board who know their stuff, and will give you the RIGHT advice.

My preferred method is individual IO loans for each property (80/90%) with the LOC pooled account covering deposit and closing costs. I live off my LOC personal account. Spreadsheet tracks expenditure from pooled account to allow distribution to each property at tax time.

Notice that a 100% offset transaction account and LOC are *pretty much* interchangable. Not identical, but pretty close. Again, a GOOD broker will find out YOUR needs, and advise appropriately. FYI - Rolf who has responded to your question is one of those brokers.

All the best,

Simon.

[harrywyborn]

Hi possumcreek,

My only question is can you budget? As LOC give you the ability to have money available to you, that normally isnt available. Can be a good product but can also be a burden too some people. If your no good with credit cards I'd be wary. But do talk to a good broker who knows what they are talking about, and try not to X-Coll, you will only restrict yourself in the future.

Good luck

[possumcreek]

Hiya Poss


In any case to access equity growth, a val and (often) a new credit assessment would be required, this is regardless of the product.

LOC products like STG portfolio have their uses, but 10 splits gets damn expensive, like over 1000 a year, something you can easily achieve with 2 splits (or 2 separate loans) and a simple spreadsheet, and 5 minutes a month of data entry.

Just my opinion, people that knowingly promote xcoll of that nature dont have a clue in regard of asset protection. Its ok to lock together a couple of IPs in a trust to say a max of 300 k, or a bit higher if there are special circumstances, but to bundle eveything will involve a very painful and expensive extraction when you are no longer in favour with that lender

ta

rolf
Thanks Rolf for reply,
I spoke to STG rep. last night and discovered that changing subaccount limits does cost nearly as much as new loan and that substituting security (like if you want to sell one IP) can be very difficult if they're all in the pot (x.coll) together.

[possumcreek]

[QUOTE=sbe]Hi Possum.



I have a LOC and love it. Means I'm no longer fretting if a payment is late, or I have a 'bad month'. Of course, to state the obvious again, it only works if you're not fully drawn....
I have two accounts - one is personal, one is Investment (pooled). The investment one has a spreadsheet to track the splits between properties.

Thanks Simon for sharing,
Are these two accounts within the one LOC account? Are these secured against only one property? ie: your PPOR. Did you need to nominate a limit for your personal account? Do you have to pay interest on the personal portion of the loan? Where I get confused is that we currently don't have personal debt as we use a savings account but changing to a LOC would mean suddenly we are using credit for everything


My preferred method is individual IO loans for each property (80/90%) with the LOC pooled account covering deposit and closing costs. I live off my LOC personal account. Spreadsheet tracks expenditure from pooled account to allow distribution to each property at tax time.

So is it your pooled account that rent goes into and all property expenses are paid and perhaps monthly interest payments for IO loans transferred from?

Thanks again and sorry if this sounds like the 3rd degree but I'm just trying to get my head around it all.

[Janfan]

Hi possumcreek

all sounds a bit complicated to me

I also have no PPOR debt

I have setup a LOC against PPoR which I use for IP deposits and costs

IO loan against IP with an offset where I place rent and takeout costs
excess funds also go here at the moment.


package has free valuations once a year so I intended to use those
to lock in equity. Not sure yet if this is practical.

Brokers I have contacted either don,t know any better or don,t seem interested

I think this is far from perfect so I am all ears for improvements.


Janfan

[sbe]

Thanks Simon for sharing,
Are these two accounts within the one LOC account? Are these secured against only one property? ie: your PPOR. Did you need to nominate a limit for your personal account? Do you have to pay interest on the personal portion of the loan? Where I get confused is that we currently don't have personal debt as we use a savings account but changing to a LOC would mean suddenly we are using credit for everything
They used to be (dreaded x-coll), but now are separate. When they were, it was Stg Portfolio, nominated limits etc. In my case, I had PPOR debt, so the 'Personal' bit was my PPOR.

PS. Why have a savings account (and pay TAX on the interest received), when you can sit that on your loans and SAVE interest and pay no tax on that......Earn 7% tax free in effect.....


So is it your pooled account that rent goes into and all property expenses are paid and perhaps monthly interest payments for IO loans transferred from?
Actually, since I had PPOR debt, all income went into that, reducing the interest bill for my house. Monthly payments for properties deducted when needed (direct debit).

Thanks again and sorry if this sounds like the 3rd degree but I'm just trying to get my head around it all.
No problem. Hope I made it clearer.

If you didn't have PPOR debt (or other personal debt), income and expenses would go to pooled account.

Cheerio

Simon.

ps. As with most things, document what you're doing.

[possumcreek]

Thanks Simon and all others who responded.

I've decided to x-coll only 2 properties in LOC instead of 3 after discussion with you folk.
Though I'm still confused as to how Margaret Lomas makes it (LOC) sound like the b all and end all. After asking more questions it didn't seem so appealing after all. Also more costly than it originally looked. But I can see it providing some flexiblity for us in the short term.

[simonjulie]

Hi PC
You said you have a number of loans with the same lender.
If you have sufficient equity and the loans are stand alone, try to get one of you securities back as a free title by shifting one of the loans onto another security or failing that xcoll what ever is left with that lender and take a title free. The bottom line to this strategy is to have sufficient equity to do the deal with the bank.
Example:
property 1 loan 100K bank val 200K
property 2 loan 150K bank val 220K
property 3 loan 75K bank val 180K
total loans= 325K
total bank vals=600K
total equity= 275K
LVR=54%
let's take property 3 back from the lender.
property 1&2 value= 420K
total of three loans = 325k = new LVR of 77%
If your original lenders LVR was 80% then you can ask them to release property 3
Why would you do that?
you now own your first IP outright and it can be used again with a different lender at a new LVR.
Leverage ,flexability and another safety net.
Kind regards
Simon

[possumcreek]

Thanks Simon,
Looks like we'll be doing something similar to this. Putting prop 1&2 together as LOC to draw on for deposit and costs or even outright purchase of future properties.
cheers PC

[bricks'n mortar]

Hi Simon,

you said:

If you didn't have PPOR debt (or other personal debt), income and expenses would go to pooled account. [/COLOR]

Does that mean you r able to put all funds earned (wages, etc.) into the LOC
provided that it is for IP only?

or really I should ask ...can you still utilise that account for payment of non IP bills as far as the ATO is concerned :confused:

[possumcreek]

Hi Simon,

you said:



Does that mean you r able to put all funds earned (wages, etc.) into the LOC
provided that it is for IP only?

or really I should ask ...can you still utilise that account for payment of non IP bills as far as the ATO is concerned :confused:

With the likes of StGeorge LOC loan you would nominate a limit for your personal use eg:$10,000 into which your wages and rent would go into and from there the money is used for whatever purpose eg: transfer to subaccounts. Obviously the interest charged on this portion of the total loan would not be tax deductable.

[possumcreek]

Hi Simon,

you said:



Does that mean you r able to put all funds earned (wages, etc.) into the LOC
provided that it is for IP only?

or really I should ask ...can you still utilise that account for payment of non IP bills as far as the ATO is concerned :confused:

A broker suggested to me that with a LOC without subaccounts that as long as you claimed a percentage of the total interest to be personal eg:5% that the ATO would be satisfied and that it's really only 100% interest claims that attract their attention. However i haven't checked this up myself as yet.

[Rolf Latham]

Hiya PC

Keep it separate. If you have PPOR debt, have it as a separate loan/split. You are asking for trouble if you dont.

ta

rolf

[possumcreek]

Hiya Rolf,
Don't have PPOR debt but would have everyday personal usage.
PC

[Kamak]

In a smilar vain - does this look OK

Live in company supplied housing
Have 3 IPs valued at 620 with 170 equity.
Am thinking of buying 4th property at 200K in which I may live in future.

Will have to have 22K ready at short notice to pay out a personal debt when required.

Put 170 equity into prop 4 with 2 LOC a/cs personal + IP
Use equity to refinace and pay deposits (10%) on 1,2,3 (Seperate or together?)

Use equity increases in 1,2,3 to firstly repay LOC and pay out mortgage (except $1000) on Prop 4

Use further equity increases in 1,2,3,4 for deposits for next houses.

Really want to have one title fully paid and in my hands.

Thoughts
Thanks