There is a common belief out there that people can use funds from a line of credit to either recycle non-deductable debt into deductable debt, or even to 'live of equity'. In some cases people even have the perception that a line of credit is a loan which is not secured by a particular property.
I'm not going to debate the tax deductablility of the line of credit in these strategies, both debt recycling and living of equity strategies imply that the borrower is not paying the interest on these facilities out of their own income. These strategies imply that interest is simply drawn periodically until the limit on the loan facility is reached.
This afternoon the CBA sent an email to brokers which has a different opinion...
Essentially the CBA's policy is summed up in the last paragraph. Banks expect reglar repayments into a LOC facility and the CBA is now making regular reviews of these facilities. I expect that the first thing the CBA would do if there were multiple breaches is they would withdraw the remaining limit. This could cause substantial financial stress to some borrowers.
There are valid ASIC approved ways to recycle debt that are not in breach of lender policy and are fully tax deductable without requiring an ATO private ruling, but it does require the right structure and strategy. Feel free to get in touch if you'd like details on how this can be done.
I'm not going to debate the tax deductablility of the line of credit in these strategies, both debt recycling and living of equity strategies imply that the borrower is not paying the interest on these facilities out of their own income. These strategies imply that interest is simply drawn periodically until the limit on the loan facility is reached.
This afternoon the CBA sent an email to brokers which has a different opinion...
CBA said:Line of Credit Accounts without payments
As you may be aware the Bank regularly conducts reviews of Line of Credit (LOC) accounts to ensure customers are enjoying all the benefits of the product. In a recent review, the Bank identified a number of LOC accounts where the customer has not made a payment for more than three months.
What's happening
From Wednesday 4 May 2011, the Bank is writing to Line of Credit (LOC) customers who have not made a payment to their account for more than three months.
What you need to know
• While there are no contracted minimum repayments for LOC accounts, customers must at least make a payment to cover monthly interest, fees and charges.
• Depending on the customers utilisation of their credit limit the letter either recommends, or requests, that they arrange regular monthly payments to their LOC account to cover monthly interest, fees and charges.
• These letters will now be sent to relevant customers every month (a single customer will be contacted no more often than every 3 months).
What you need to do
• If you receive customer enquiries about these letter(s), reiterate the importance of making regular payments to their LOC account to meet monthly interest, fees and charges.
• Discuss the various payment options available (e.g. salary credits, NetBank Scheduled Transfer, Automated Funds Transfer etc) and assist them to make these payment arrangements.
Want to know more?
The Consumer Mortgage Lending Products Terms and Conditions state in clause O3.1/LOC3.1 on page 70 that:
"Unless we agree otherwise, each calendar month you must deposit to your account amounts equal to or greater than the total of any interest, fees and charges debited to your Loan Account during the previous month, or otherwise when we demand it."
Essentially the CBA's policy is summed up in the last paragraph. Banks expect reglar repayments into a LOC facility and the CBA is now making regular reviews of these facilities. I expect that the first thing the CBA would do if there were multiple breaches is they would withdraw the remaining limit. This could cause substantial financial stress to some borrowers.
There are valid ASIC approved ways to recycle debt that are not in breach of lender policy and are fully tax deductable without requiring an ATO private ruling, but it does require the right structure and strategy. Feel free to get in touch if you'd like details on how this can be done.