Funding: LOC vs Refinancing

[pats]

Hi All

Long time reader, first time poster here (not sure why I haven't posted before, maybe just feel although I haven't had anything of value to contribute, and all of the questions that I have in the past have already been answered on previous posts) Anyway sorry for the long first post.

I have question about a LOC vs. Refinancing and am hoping that somebody may be able to assist/ share there experiences.

Current Situation
1 IP (no PPOR)
Valuation $200k
Loan $100k (P&I)
Offset Balance $30k

Aim
Small Reno of IP ($10k)
Look to buy another IP in future

Options
- Fund Reno from offset
- Source funds from bank (preferred option)

I am leaning towards sourcing the funds from the bank, because this way, I keep my existing cash free and potentially obtain access to addition funds (to potentially assist in the purchase of another IP in the future).

Options for funding
- Line of Credit
- Refinance existing product (preferred option)
(Funds only to be used for income producing purposes)

Rather than use a LOC, I thought (from speaking to my bank), that I could refinance my existing loan to 80% LVR, putting the addition funds into the offset and also change the loan to interest only.

This would result in
Loan $160k
Offset $90k

What are peoples thoughts on the above. From speaking to other people, most people seem to use a LOC rather than refinance. Is there any particular reason why?

Thanks
Patrick

 

[Mick C]

Hi All

Long time reader, first time poster here (not sure why I haven't posted before, maybe just feel although I haven't had anything of value to contribute, and all of the questions that I have in the past have already been answered on previous posts) Anyway sorry for the long first post.

I have question about a LOC vs. Refinancing and am hoping that somebody may be able to assist/ share there experiences.

Current Situation
1 IP (no PPOR)
Valuation $200k
Loan $100k (P&I)
Offset Balance $30k

Aim
Small Reno of IP ($10k)
Look to buy another IP in future

Options
- Fund Reno from offset
- Source funds from bank (preferred option)

I am leaning towards sourcing the funds from the bank, because this way, I keep my existing cash free and potentially obtain access to addition funds (to potentially assist in the purchase of another IP in the future).

Options for funding
- Line of Credit
- Refinance existing product (preferred option)
(Funds only to be used for income producing purposes)

Rather than use a LOC, I thought (from speaking to my bank), that I could refinance my existing loan to 80% LVR, putting the addition funds into the offset and also change the loan to interest only.

This would result in
Loan $160k
Offset $90k

What are peoples thoughts on the above. From speaking to other people, most people seem to use a LOC rather than refinance. Is there any particular reason why?

Thanks
Patrick

I give you the Cons and Pros of each option;

LOC

Pro:
* easy to access funds - can redraw 10,20,30 k for what ever reason you want.
* One global limit ie approved up to 80% LVR
* You be able to redraw you 10k for renos when ever you like, and then further down the track you be able to redraw 10-20k up to your global limit for the deposit of the 2nd IP- without using your own offset funds.

Cons
* interest is higher 0.5-1% +
* Hardier to save and reduce the Principle amount - so lots of discipline required
* IF you do redraw the funds as a deposit the bank would want to see 5% GENUINE savings and LOC redraw is not genuine savings ( there are way around this by choosing the right lender- NON G/saving product)


Refin

Pro
* Easy to set up and manage
* rate is at standard or lower rate (hopefully)
* Option for P and I - helps lower loan principle

Con
* If you decide to cash out ( ie borrow and redraw more then needed) if it's over 70% LVR OR $5,000 ( different lender to lender) then you will need to give a reason - and renovations are not always acceptable with all lenders.

* If renovation cash out is accepted, the bank will ask for quotes and money will be released in "stages"

* Cash out for deposit on 2nd IP will require the sale contract signed.
* Less flexible and less control on your money


----
My advice, really need to sit down and talk about another issue ie- how long you planing on keeping this IP and 2nd IP for ( your investment strategy) , what is your budget on the 2nd IP and do you have a particular lender you prefer etc...


But in Short, i would say go for Re-fin - refin to 80% LVR- cash out 10k for now for renovations, then later down the track use the offset funds you have as deposit, cash out another 12-15k for the Stamp duty and LMI ( if applicable) so in a way your using your IP cash out which is tax deductible to pay for the stamp duty tax AWESOME!


Regards
Michael.

 

[marty29]

Patrick, the key questions here are how many accounts do you want to manage? And are you going to use the funds in your offset account for other personal expenses?

Option 1 - LOC
You will have 1 loan account, 1 offset account and 1 LOC.

Option 2 - Refi
You will have 1 loan account and 1 offset account

Personally, I will go with option 1, as I know what each account is for. For example, offset account = personal; LOC = investment (reno, deposit for next IP etc).

If I go with option 2, I may be tempted to spend all the money!

 

[The Sniffer]

First and most important question is which bank are you with?

You might be able to increase your existing loan for free and have the money available the same day. No fees. Maybe you can’t but that is why knowing the lender it important.

No point in having a LOC if you have offset... I would just increase the loan to 80% and if you don’t need the money put it back in to redraw for when you need it.

 

[Rolf Latham]

Hi Patrick

Often an internal top up is a good soln...........does depend on who the lender is too though, because some have weirdo offset accounts and other odd rules

ta

rolf

 

[Rolf Latham]

PS

the reason why borrowing over cash is preferred here is because your cash is tax paid, AND you may want to buy a PPOR one day, or a car or some other non deductible, so often best to keep your cash stashed either in offset or elsewhere depending on what u can get and what ur marginal rate of income tax is

ta
rolf

 

[pats]

Thanks for the feedback (Mick C, Nice summary)

To answer questions raised.
I am with Adelaide Bank. The use of funds for non deductable purposes has not been an issue yet, (although I can see how it would be with 1 account). I plan on keeping the IP long term.

Looks like I may go refinance, Based upon.
- Easy access to cash as in offset account (atleast that is what I think. Need to clarify with lender based upon responses below)
- lower interest rate
- Easy to setup and manage 1 account

Catch
Patrick

 

[Rolf Latham]

Hi Pat

ABL offset product is good and useful for this purpose as long as you keep separate accounts for your personal money ( savings and incomes) and borrowed money.

ta
rolf

 

[Wandering]

Sorry to drag up an old post.

I have been told by Adelaide Bank in the past that I can't add an new offset account to an existing loan. Is that still correct? How did you go Patrick?

Thanks in advance.

 

[Terry_w]

Rather than use a LOC, I thought (from speaking to my bank), that I could refinance my existing loan to 80% LVR, putting the addition funds into the offset and also change the loan to interest only.

If you did this the interest would not be deductible and you would end up with a mixed purpose loan which would create years of pain.

 

[sonnic]

If you did this the interest would not be deductible and you would end up with a mixed purpose loan which would create years of pain.

Hi,

Thank-you all for the wonderful and knowledgeable posts that I have learnt so much from. Long time reader first time poster?

Terry can you provide more detail as to why the interest would not be tax deductable?

Sonnic

 

[Terry_w]

Hi Sonnic

Sorry, I should have said the extra interest on the increase would not be deductible as the purpose of this borrowing is personal - you would be borrowing to place in an offset account.

If you avoided the offset account the interest may be deductible if borrowed funds are used to invest directly.

 

[sonnic]

Hi Sonnic

Sorry, I should have said the extra interest on the increase would not be deductible as the purpose of this borrowing is personal - you would be borrowing to place in an offset account.

If you avoided the offset account the interest may be deductible if borrowed funds are used to invest directly.

Hi Terryw,

Thank-you for your response.

From the above, it reads to me that the top up funds would be used for investment purposes. 10k for the reno straight away and the remainder of 50k to sit in the offset for future investment use.

Would the interest on the 50k be deductable when used?

Sonnic

 

[Terry_w]

Hi Terryw,

Thank-you for your response.

From the above, it reads to me that the top up funds would be used for investment purposes. 10k for the reno straight away and the remainder of 50k to sit in the offset for future investment use.

Would the interest on the 50k be deductable when used?

Sonnic

But the funds are being placed into a savings account first - this is the problem. Once they are in the savings account they are no longer borrowed funds.

 

[sonnic]

Thank-you so much for the clarification. So much to learn.

Sonnic