Accessing PPOR equity to invest in IP: Top Up or Line Of Credit

Hello all,

I've been thinking about the differences between the loan Top Up and Line Of Credit to access equity from my PPOR. The idea is to further invest it in IP.

Am I right assuming that topping up my PPOR loan and investing the money in IP will cause problems with tax management? If so, I suppose separate LOC would work better from tax perspective.

Alternatively, can I split my loan after topping it up to be able to use the funds in IP? Would it work better from tax point of view?

What's the usual way for investors to do this?
 
I would keep the non tax deductible loan separate from the tax deductible loan thus wouldn't do a top up.

Instead I would set up a separate facility for the equity release and do it as a term loan rather than a LOC.
 
Hello all,

I've been thinking about the differences between the loan Top Up and Line Of Credit to access equity from my PPOR. The idea is to further invest it in IP.

Am I right assuming that topping up my PPOR loan and investing the money in IP will cause problems with tax management? If so, I suppose separate LOC would work better from tax perspective.

Alternatively, can I split my loan after topping it up to be able to use the funds in IP? Would it work better from tax point of view?

What's the usual way for investors to do this?

Second Shahin - set it up as a new split loan.

It will look like:

Current PPOR Loan: Not tax deductible.
New equity release loan: Tax deductible (purpose is to invest in property).

Pretty easy to do assuming you meet lending criteria.

Cheers,
Redom
 
I would (and always do) set up a separate LOC (ppor or IP secured ) used purely for Investing purposes. Simpler structure with flexibility options.

Use it for funding IP deposits, purchasing costs & holding expenses.
 
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Don't touch the existing loan.

Just take a new loan from the same bank secured against the same property.

The two methods are line of credit, or loan + offset.
There is a 3rd method where you buy the property with the same bank and cross-collateralise but you don't want to go there...

I always preferred line of credit since you don't have to draw it until you need it, and there's no way of the funds being paid incorrectly by the bank. However the interest rate is slightly higher, but usually the LOC portion of your debt is small overall.

The other way is to setup a separate transaction account (NOT the same one you use for personal funds/transactions), and take a new loan (same property as security), and direct it to be paid into the new transaction account. Then of course make that transaction account an offset too.

The problem with the second approach, is sometimes the bank screws up and totally ignoring your instructions, pays the loan into whichever account they want (often your "designated transaction account"). In which case they have mixed personal funds with investment funds, which means you need to talk to your accountant before spending them. Usually can pay it back onto the loan and redraw it again if you have that feature, unless you've gone fixed interest then you're in trouble...

In short - line of credit is the safest option as you control the funds. Investment loan + Offset is the cheaper option, since it's usually 0.1/0.2% below line of credit rates.
 
Am I right assuming that topping up my PPOR loan and investing the money in IP will cause problems with tax management? If so, I suppose separate LOC would work better from tax perspective.

Alternatively, can I split my loan after topping it up to be able to use the funds in IP? Would it work better from tax point of view?

What's the usual way for investors to do this?

Yes you are correct. Problems will result, especially if your loan is PI. A separate LOC would be the way to go.

You could split the loan later, but any deposits into the loan would come off both portions so it would be best to split before using.

The usual way for investors should not be relied on - stuff things up now and then put heads in the sand and pretend nothing is wrong!
 
Thanks guys for quick responses! I've got plenty to think about.

Quick clarification regarding the equity access and borrowing capacity. Say I go ahead and setup separate loan/LOC and don't use the funds until I find an IP. Does setting it up decrease my borrowing capacity?

E.g. say the bank could lend me $500000 before I set up LOC. I go ahead and setup LOC for $50000 but don't use the funds yet. Does this impact the amount the bank was willing to lend me?

This may sound like a simple thing but I'm really not sure about this guys.
 
Thanks guys for quick responses! I've got plenty to think about.

Quick clarification regarding the equity access and borrowing capacity. Say I go ahead and setup separate loan/LOC and don't use the funds until I find an IP. Does setting it up decrease my borrowing capacity?

E.g. say the bank could lend me $500000 before I set up LOC. I go ahead and setup LOC for $50000 but don't use the funds yet. Does this impact the amount the bank was willing to lend me?

This may sound like a simple thing but I'm really not sure about this guys.

Yes, the full limit has to be included in what you disclose on applications. Talk to your broker he will help you plan out which order to do applications in with each bank for the best effect on the calculations
 
Thanks guys for quick responses! I've got plenty to think about.

Quick clarification regarding the equity access and borrowing capacity. Say I go ahead and setup separate loan/LOC and don't use the funds until I find an IP. Does setting it up decrease my borrowing capacity?

E.g. say the bank could lend me $500000 before I set up LOC. I go ahead and setup LOC for $50000 but don't use the funds yet. Does this impact the amount the bank was willing to lend me?

This may sound like a simple thing but I'm really not sure about this guys.

Does it decrease your borrowing capacity?

As danwatto said, even if you're not using it or paying interest on it, you'll need to include the full debt and the associated repayment in application.
 
Cool. That's just what I though. Just wanted to double check.

In terms of the above sample numbers guys. In general, will the bank be able to lend me $450000 (as $500000 - $50000 LOC)? Is it going to be lower than $450000?
 
Cool. That's just what I though. Just wanted to double check.

In terms of the above sample numbers guys. In general, will the bank be able to lend me $450000 (as $500000 - $50000 LOC)? Is it going to be lower than $450000?

Should be the same borrowing cap Evgen. How you split it between loan types (LOC|Fixed|Variable) won't make much of a difference.

Cheers,
Redom
 
My current PPOR loan is variable IO and I was considering fixing the rate. Is it possible to have it structured as fixed IO and still setup LOC the moment I fix it?
 
Thanks Rixter!

Can I increase LOC amount in say several years if I get more equity in my PPOR? Does variable/fixed rate has any impact on this?

Yes you can increase it. Variable/fixed will affect future lending. If you choose fixed, it will locked and usually harder to get money then
 
If a loan is fixed there is always the possiblity to get a separate LOC set up with the same bank using the same property as security. No difficulties as long as you can service etc.

However if you cannot service or need to change banks for other reasons the fixed portion will hold you back - or potentially need to be broken = potential exit fees.
 
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