Different home loans and offset or LOC.

[Cathaygirl]

Hi SS-ers,

I have been reading in this forum and property books a dozen times and am still puzzled with the difference and future tax implication between LOC and offset acc. Pl forgive but my brain has just stop working and refuse to comprehend

My situation is I am Currently in the midst of purchasing a PPOR and I am deciding of the type of loan. Lately, I have been getting mix understanding on whether to go on P&I loan or interest loan for PPOR.

My goal is to gain as much equity as possible( through manufactured growth with the hse) and to start a IP portfolio.

With that, I need to have an off set account to reduce the interest on the loan. Does that necessarily have to be a P&I loan, or will it be just as beneficial to put an offset against an interest loan only?

Now, What is the main difference between LOC and Offset acc? My understanding is that to be able to claim for a tax deductible interest for future IP Loan, it can only be claimed if was an offset account.

I am getting way over my head with all the knowledge I have been reading here. But, please tell me if I am WAY off the charts about this and if you can kindly explain in simple English terms the difference, and what would suit my situation.......I would be eternally grateful!

Kind rgds, CG

 

[Rolf Latham]

Hi CG

Interest only with 100 % offset.

Generally only available with variable rate, but there are a couple of lenders where you can do both fixed and offset.

Otherwise, if you wanted to fix some, then you can fix some of your loan amount and leave the rest variable with offset

PI and LOC may cause tax issues if you pay money directly into the loan, and ever turn the place into an IP and purchase a new PPOR with borrowings.

Many, but not all brokers and bankers are all over this sort of stuff.

In any case, dont take tax advice from a brokeror banker without getting approval from your tax person.

ta
rolf

 

[jonmardell]

With regards to offset accounts you can have them attached to interest only loans. The benefit you can reduce your interest by placing surplus funds into the offset account so you only pay interest on the difference between the balances of the loan account and the offset account.

A common scenario is people buy a property to live in and start paying P&I but later on they decide to upgrade and but a new PPR and turn the current only into the investment property. With this you can only claim the interest on the loan balance at the time and you can't redraw any surplus funds and claim the interest as the purpose of the funds determines the tax deductibility and not the security.

A line of credit would need to be used solely for investment or non deductible purposes and you should never mix the purpose of any funds in the account.

Hi SS-ers,

I have been reading in this forum and property books a dozen times and am still puzzled with the difference and future tax implication between LOC and offset acc. Pl forgive but my brain has just stop working and refuse to comprehend

My situation is I am Currently in the midst of purchasing a PPOR and I am deciding of the type of loan. Lately, I have been getting mix understanding on whether to go on P&I loan or interest loan for PPOR.

My goal is to gain as much equity as possible( through manufactured growth with the hse) and to start a IP portfolio.

With that, I need to have an off set account to reduce the interest on the loan. Does that necessarily have to be a P&I loan, or will it be just as beneficial to put an offset against an interest loan only?

Now, What is the main difference between LOC and Offset acc? My understanding is that to be able to claim for a tax deductible interest for future IP Loan, it can only be claimed if was an offset account.

I am getting way over my head with all the knowledge I have been reading here. But, please tell me if I am WAY off the charts about this and if you can kindly explain in simple English terms the difference, and what would suit my situation.......I would be eternally grateful!

Kind rgds, CG

 

[Terry_w]

Hi SS-ers,

I have been reading in this forum and property books a dozen times and am still puzzled with the difference and future tax implication between LOC and offset acc. Pl forgive but my brain has just stop working and refuse to comprehend

My situation is I am Currently in the midst of purchasing a PPOR and I am deciding of the type of loan. Lately, I have been getting mix understanding on whether to go on P&I loan or interest loan for PPOR.

My goal is to gain as much equity as possible( through manufactured growth with the hse) and to start a IP portfolio.

With that, I need to have an off set account to reduce the interest on the loan. Does that necessarily have to be a P&I loan, or will it be just as beneficial to put an offset against an interest loan only?

Now, What is the main difference between LOC and Offset acc? My understanding is that to be able to claim for a tax deductible interest for future IP Loan, it can only be claimed if was an offset account.

I am getting way over my head with all the knowledge I have been reading here. But, please tell me if I am WAY off the charts about this and if you can kindly explain in simple English terms the difference, and what would suit my situation.......I would be eternally grateful!

Kind rgds, CG

There is no different tax treatments between a LOC and a loan with an offset. They are treated the same.

But there are potential problems with each.

Using a LOC as a transaction account is terrible. Eventually would result in you having a large loan with none of the interest being deductible. This is because each deposit is a repayment and each withdrawal is a new loan for tax purposes.

IO loan with offset saves this problem because you are no paying money into a loan. An offset account is merely a savings account and is separate from the loan.

But the problem with offset accounts is cash builds up and you may be tempted to use it to invest. THis will result in you paying more tax because you are using cash. Your non deductible interest will increase too.

I made a post last night on another thread with a strategy to get around this potential problem. Have a look

 

[jate]

There is no different tax treatments between a LOC and a loan with an offset. They are treated the same.

But there are potential problems with each.

Using a LOC as a transaction account is terrible. Eventually would result in you having a large loan with none of the interest being deductible. This is because each deposit is a repayment and each withdrawal is a new loan for tax purposes.

@Terry_W are you only saying the interest is not deductible because @Cathaygirl was thinking about using the LOC for a PPOR? If the LOC was for a IP then it would be fine right?

I really thought people used LOC 'basically' like a transaction account to pay all their IP bills and what not. Wasn't that the appeal of a LOC?

But the problem with offset accounts is cash builds up and you may be tempted to use it to invest. THis will result in you paying more tax because you are using cash. Your non deductible interest will increase too.

I get the non-deductible interest part that will be increased, but how are you paying more tax just because the money in offset account is cash?

I made a post last night on another thread with a strategy to get around this potential problem. Have a look

Realise this was a month of so back before I joined the forums, do you have the link to it? or what was the subject heading on this thread?

 

[Terry_w]

@Terry_W are you only saying the interest is not deductible because @Cathaygirl was thinking about using the LOC for a PPOR? If the LOC was for a IP then it would be fine right?

I really thought people used LOC 'basically' like a transaction account to pay all their IP bills and what not. Wasn't that the appeal of a LOC?


I get the non-deductible interest part that will be increased, but how are you paying more tax just because the money in offset account is cash?


Realise this was a month of so back before I joined the forums, do you have the link to it? or what was the subject heading on this thread?

The problem with a LOC is that money is coming in and out constantly. Each in = repayment and each out = new borrows.

Interest is only deductible, generally, if the borrowed money is used to purchase an income producing asset.

So if someone had a LOC on their home and used it as a transaction account the amount of money associated with the purchase of the property in that loan would be small. This is because there would be hundreds of new borrowings over the years. So after 5 years or so there may still be a large loan but if they were to move out and rent the property non of the interest would be deductible. Or maybe a small portion would be, but it would be extremely difficult and costly to work out what portion would be deductible.

Never use a LOC as a transaction account - EVER!.
Only use a LOC to access equity which will be used as deposit for the next investment and then only ever pay the interest on this LOC. Never deposit any other money in it.