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I would suggest you drawn down the LOC to pay for the 20% plus costs etc. Then split this loan into 2. One a LOC and one a IO loan with offset. eg. $100,000 house, $80,000 LOC. You use $20,000 for the deposit on the IP so rearrange things to this: $60,000 LOC $20,000 IO loan with offset...

This sounds like you know what you are doing, but your broker doesn't, so you are lucky he didn't stuff things up. No offset on a LOC, but that doesn't matter because you will be borrowing 80% of the new property anyway. Set this up as a IO loan with a 100% offset and park your funds there...