How to finance deposit for IP?

[Samwise]

Just been visited by mortgage broker to discuss finance for IP1. Read a lot about releasing the equity in PPoR and getting a LOC to fund a 20% deposit + costs.

Broker says another option is to just get a budget loan for the same amount... 0.1% cheaper and no recurring fees.

Is there any reason why people get a LOC rather than just a budget loan to fund an IP deposit? I really dont see much difference.

Cheers, Sam

 

[Simon]

Perhaps the term of the loan?

LOC has no set term whereas a personal loan might be 5 or ten years max.

 

[rugrat]

You are talking about another mortgage loan as opposed to a LOC, right?

We looked at that, but a LOC gives up more flexibility. But it really depends on what you need and want, depending on your personal circumstances.

 

[mortgageman]

Hi Samwise,

You can effectively structure by taking out an interest only loan with an offset account, rather than a line of credit. As Simon says, the term of the loan is the key difference. A LOC can be drawn up and down indefinitely, while if you were to take out an interest only loan with an offset account, the interest only period may only be for five years (some lenders will do up to 10 years). If by "budget loan" your broker is referring to a basic facility, I don't think this would be a good idea as the funds would need to be fully drawn straight away and you would not have the flexibility to adjust the drawn amount as with a line of credit or loan with offset account. I hope that helps.

Cameron Perry
Perry Financial Strategies

 

[Rolf Latham]

In generalthough it does depend on the lender and the product

Eg WBC basic IO loan and the pro pack rocket have the same rate over 250 k but the rocet has free redraw even during the IO period, thus acting like a LOC

Please note that not all loan products are alike, some IO products dont have redraw period !

ta
rolf

 

[Samwise]

Thanks for the help guys...

My PPoR is mortgaged with Bankwest so this deposit facitility will also be with BankWest. Their Line of Credit is 6.53% with $325pa charges but a budget loan is 6.43% with no charges. I think it was a 30 year term and i could go I/O for the first 5 years at least.

I didnt realise that LOC had an indefinite term.

There doesnt really seem to be much in it... but the broker did say that because of offset accounts, the budget loan pretty much acts as a LOC anyway nowadays. You just draw down the loan fully then stick it all back in the offset account.

Thoughts?

 

[Perp]

You are talking about another mortgage loan as opposed to a LOC, right?

I often hear people use this terminology, and it intrigues me. Why do you say "as opposed to"?

 

[Peter_Tersteeg]

Often a basic loan is just as good as a LOC. Most people tend to understand the context of the words, "Line Of Credit", so it gets used as a contextual description as well as a noun.

We just make sure when we're making the recommendation the customer specifically understands what it is they're getting.

 

[Samwise]

Cool, thanks... will go with that then

 

[tdh78au]

the broker did say that because of offset accounts, the budget loan pretty much acts as a LOC anyway nowadays. You just draw down the loan fully then stick it all back in the offset account.

Thoughts?

This may have tax implications? as the funds are not used for IP deposit ... but rather bank account (offset) deposit ?

 

[Perp]

This may have tax implications? as the funds are not used for IP deposit ... but rather bank account (offset) deposit ?

Whilst the funds are sitting in the offset account, they're not attracting interest to deduct anyway, so there are no implications. Provided they're used for investment purposes when withdrawn, it's not a problem. Using LOC funds for private purposes has exactly the same issues, if it's an investment LOC.