Having cash available - tightening credit - LOC vs Redraw/Offset vs Term deposit

[DavidMc]

Given the global tightening of credit, news that some banks are not taking on new business and a few rumours of others canceling LOCs or clawing back redraws, what bank product strategy do you think is best used to hold the majority of our emergency/buffer funds (that we wish to remain 'available')?

1 - Have the available funds as cash in a regular transaction account (may be linked as an offset). Lending bank or another bank?

2 - Have available funds in a undrawn LOC.

3a - Regular loan, draw down all funds and place in a linked offset.
3b - Regular loan, draw down all funds and repay into loan minus $1 (or $100 - whatever the minimum amount the bank has before it closes the loan completely).

4a - Regular loan, draw down all funds and store in term deposit in another bank.
4b - Regular loan, draw down all funds and store in an alternate investment (for example shares).

5 - Something else
6 - Huh?

For years I have been using option 3b and sometimes option 3a. I think this is a nice balance between convenience and cost and IMO provides better protection against a potential 'cancellation of funds' than a LOC.

I've never required the unlimited redraws an LOC provides and therefore didn't want to pay the additional few % they generally cost.

Option 4a and 4b obviously provides the ultimate 'cancellation of funds' protection however is less convenient and costs slightly more. Double the paperwork and internet banking sites to log into and much larger cash flows to manage. For my safety buffer personally I'd go option 4a over 4b.

What do we all think and why? Any thoughts from Brokers?

 

[MJK]

Given the global tightening of credit, news that some banks are not taking on new business and a few rumours of others canceling LOCs or clawing back redraws, what bank product strategy do you think is best used to hold the majority of our emergency/buffer funds (that we wish to remain 'available')?

1 - Have the available funds as cash in a regular transaction account (may be linked as an offset). Lending bank or another bank?

2 - Have available funds in a undrawn LOC.

3a - Regular loan, draw down all funds and place in a linked offset.
3b - Regular loan, draw down all funds and repay into loan minus $1 (or $100 - whatever the minimum amount the bank has before it closes the loan completely).

4a - Regular loan, draw down all funds and store in term deposit in another bank.
4b - Regular loan, draw down all funds and store in an alternate investment (for example shares).

5 - Something else
6 - Huh?

For years I have been using option 3b and sometimes option 3a. I think this is a nice balance between convenience and cost and IMO provides better protection against a potential 'cancellation of funds' than a LOC.

I've never required the unlimited redraws an LOC provides and therefore didn't want to pay the additional few % they generally cost.

Option 4a and 4b obviously provides the ultimate 'cancellation of funds' protection however is less convenient and costs slightly more. Double the paperwork and internet banking sites to log into and much larger cash flows to manage. For my safety buffer personally I'd go option 4a over 4b.

What do we all think and why? Any thoughts from Brokers?

These scenarios are of interest to me. I have just set up a new loan with ANZ with a redraw facility and an offset/transaction account. I will pay half off when a property settles and then redraw for investment use.

I am unsure about whether I should redraw immediately and place the funds into the offset or redraw when I need the money only? I'm looking for quick and easy control. I've never been an ANZ customer before.

In the past I've use LOC with ST George. Portfolio loan

Really though, with regards to lending claw backs.... are you being a bit paranoid? I can see Aussie banks tightening new lending but clawing back existing facilities seems a bit extreme?


MJK

 

[DavidMc]

Really though, with regards to lending claw backs.... are you being a bit paranoid? I can see Aussie banks tightening new lending but clawing back existing facilities seems a bit extreme?

Unsure. Maybe. Maybe not. I mean, if it doesn't cost much and is simple enough, why not? I have been doing the offset thing for years because it was the same effect as a LOC but cheaper, the fact that it's harder (or less likely) for them to claw back is an added bonus.

GrossReal swears that the draw down and term deposit is the only way to go. People in the US have had their unused LOCs canceled.

 

[MJK]

GrossReal swears that the draw down and term deposit is the only way to go. People in the US have had their unused LOCs canceled.

Both interseting comments.

What is gross reals logic?

MJK

 

[ffc1883_1996]

Not sure which way to vote. Until now I’ve always used redraw and LOC accounts to store cash but I’m very tempted to withdraw all funds and place them in term deposits and savings accounts.

 

[DavidMc]

What is gross reals logic?

http://www.somersoft.com/forums/showthread.php?p=392977#post392977

 

[dave99]

Redraw of amounts paid in advance, and draw down of LOC, are both subject to approval from the lender at the time and can be refused if the lender desires. In the US this is starting to occur.

Offsets can be withdrawn at any time, but can be applied immediately against the loan balance if you default.

A separate term deposit account is not touchable at all by the lender.... But you must pay tax on the interest, unlike an offset.

So the best option is probably an offset. But it may cost more to have that facility.

 

[aaarghhh]

Given the global tightening of credit, news that some banks are not taking on new business and a few rumours of others canceling LOCs or clawing back redraws, what bank product strategy do you think is best used to hold the majority of our emergency/buffer funds (that we wish to remain 'available')?

Hello David

Haven't banks ALWAYS been able to cancel LOC's, claw back redraws, change the term and conditions for any of their loan products at their own descretion? I'm sure it states that they can change the T&Cs when ever they want.


BTW I picked the answer (1) - offset account.

Aaron

 

[DavidMc]

Haven't banks ALWAYS been able to cancel LOC's, claw back redraws, change the term and conditions for any of their loan products at their own descretion? I'm sure it states that they can change the T&Cs when ever they want.

Yes, they have. It's not a question of 'are they allowed to' (or not), it's a question of 'are they likely to?' and 'what are you doing to protect against it?'.

Tax would be paid on the term deposit however this would be offset by they additional tax deduction on the higher interest incurred. Still, this strategy is inconvenient and more costly, you would need to setup an auto debit from one bank to another (actually this might not be too bad) and you would always have to 'top up' this account the difference between the cash rate and the interest rate.

 

[bellingenbob]

'Brand risk' (ie, risk to their reputation as a lender) should stop the major lenders from withdrawing approved limits where funds are unutilised. It would take them a long time to get support back from the investor focused brokers that would dump them if they tried it.

There will be recognition soon that Australian lenders had nothing to do with creating the global credit squeeze that has emanated from poor lending practices in the U.S. and apart from the temporary withdrawal of some lenders that relied too heavily on raising funds in the capital markets (Macquarie Bank for example) we should be back to normal by the end of the year. We're already seeing this recognition in the recovery of Australian bank share prices.

 

[DavidMc]

'Brand risk' (ie, risk to their reputation as a lender) should stop the major lenders from withdrawing approved limits where funds are unutilised. It would take them a long time to get support back from the investor focused brokers that would dump them if they tried it.

Fair point. Unless they ALL do it, like they did with the rate rises independent from the RBA rises.

They are in the business of lending money. I can see them increase the cost of this money but not reduce the amount of money lent.

 

[rodimus]

wouldn't a LOC be the best way to do it? But I heard from bankwest that there cannot be undrawn amounts in their LOC.

Whats the difrerence between offset and LOC? Is offset where you put in $ into your homeloan to get the principal down instead of a separate LOC account?

 

[Rockstar]

wouldn't a LOC be the best way to do it? But I heard from bankwest that there cannot be undrawn amounts in their LOC.

Whats the difrerence between offset and LOC? Is offset where you put in $ into your homeloan to get the principal down instead of a separate LOC account?

Rodimus,

I have an offset acc. with CBA called a MISA. It has the same account number as the loan account but is separate. I always have the loan fully drawn and have my buffer sitting in the MISA. The MISA has 100% offset capacity so acts like a LOC. I also run a savings account where my loan repayments are debited from. So when repayments are due I need to transfer money from the misa to the savings account on the day before. I just keep a small amount in the savings account at other times for day to day needs.(usually less than $500)

Ian

 

[steveadl]

Very interesting subject. I haven't done it yet, but if I were to choose in the current environment - I would pick 4a just to be on the safe side.

I think the whole crisis has been blown a bit out of proportion - in Aust. anyway. But I wouldn't want to be hit with a nasty surprise from the bank.

 

[crc_error]

does any bank have a 100% offset which is a normal transaction account?

The CBA MISA isn't a full transaction account, its more like a online saver account like ING has.

 

[grossreal]

hi all
an off set account is very different to a loc account.
a loc is say 1 mil val and a 800k loan and you throw 200k into it so the loan is 600k now with 200 available but the lender has on there book 600k now when you apply to get that 200k out of the loc the lender has to revalue the property usually its a rubber stamp but they can and they will make it a requirement that you reapply and thats the rub as its like a new loan all over again.
its it going to come yes it is.
are some already mutting it yes they are.
some are even asking that the reason for the redraw be given now this maybe not an issue for some but the loc was there to redraw at will and that is going to change.
the loc for a lender is money that they should have in there bank or lending institution that they are not getting any interest on.
so you will see a couple of things.
1 say 8% on the 600k and 4% interest on the 200k thats sat in your loc even if you don't use it or higher depending on the lender.
2 8% on the 600k and a new loan each and every time you want to borrow the 200k and that all and very time you want to borrow so if you borrow 50k new loan,
now some of you may think that 2 will not happen.
well sorry to say already seen it and thats a sydney lender
it was very quickly squashed but tried all the same
and there is a little bit in the loan docs that says that a lender can vary the terms of the loan at any time.

with regards to tax there would be no difference if the loan and the term deposit was in the name of the same entity they would wash at account keeping time as you would have interest charged and interest gained and if both were for income producing then I don't any difference.

with regards to my logic is that lender will try any thing that will reduce risk increase profit and save them money
a loc costs them with very little benefit to them.
I leverage off money so the more I have or control the better and a banks job is to give me as little as possible above there risk profile.
and as lending on locs are lent not against true value( ie you just bought it)but against valuation value(ie you just got a valuer to say its worth more )then the second has a higher risk profile as it is not a realised value but a percieved value( and we know what the happened with the precieved values in the US market) the trouble is that percieved values can change and do and when they change as is the case with the US market then lenders go back to the old system which is you wantto reborrow well you resubmitt we check you out and see if you are a higher risk.
this is not uncommon in the commercial market if you get a hanover loan for instance and you are doing a construction loan they want you to submit the paperwork for the loan again every 12 months and if the position of the applicant changs within that time frame then they have the right to renegotiate the loan docs so its not uncommon.
its just that locs have been there that you borrow the 800k put in 200k the loan goes to 600k and you can redraw at any time that 200k no questions asked.
we will see if that stays the case.
oh and for those that have not read it yet there is a new post with regards to nina and her lost loc.
and there is a very interest point in the article that goes to center of this post a loc is not your money its dedt given to you by a lender and they don't have to give you dedt.
were as (and this is where I disagree with the article) taking that money out is still dedt but is now money and the dedt is still there but you have the money.
and if you were to ask nina which way she would go now I am sure it wouldn't take an einstein to give you the answer.
couldn't copy the link to the somersoft post but here the article
http://globaleconomicanalysis.blogspot.com/2008/03/citigroup-freezes-helocs.html

 

[DavidMc]

Citigroup takes away LOCs in the US - http://www.somersoft.com/forums/showthread.php?t=40707

 

[Finance guru]

crc error, A couple of lenders have offset accounts that are normal transaction accounts. Westpac, St George and AMP do (off the top of my head), but I'd have to check the others.

My preference is an offset account above a redraw or a LOC. Because they're usually cheaper and have more flexibility. These 3 options also ensure that you're getting the most out of your savings. While the term deposit option is probably more secure, you will be earning less interest than you're being charged on the loan.
Alternatively, if you can find a secure investment with a better return than you loan's interest rate, that's a good choice too... (And if you find one let me know! lol)

 

[grossreal]

hi Finance guru
might sound tongue in cheek but a term deposit in a south african bank in say durbane the same security but a higher interest rate.
I can give you a list of interest rates that are higher then aust but putting money into term deposits unless you are leveraging off those deposits are not seen by me as investing but that just my view.

 

[dave99]

does any bank have a 100% offset which is a normal transaction account?

The CBA MISA isn't a full transaction account, its more like a online saver account like ING has.

Hi crc - My ANZ offset account is a standard transaction account with card access, cheque, internet banking etc.