1/ Lower interest rates
2/ Ability to fix
3/ Tax structuring advantages
4/ Lower risk assessment to banks/lenders
Hope this helps.
Interest on Interest and Capitalising Interest - the Facts
- Thread starter Corsa
- Start date
1/ Lower interest rates
2/ Ability to fix
3/ Tax structuring advantages
4/ Lower risk assessment to banks/lenders
Hope this helps.
If you pay the LOC from the offset that is offsetting your PPOR you are losing the whole benifit of minimising personal debt?
MJK
But let's say the annual interest bill is $20K
I borrow that amount from LOC2
LOC2 now goes up by $20K
The interest on LOC2 now costs me $1.8Kpa and I pay that $1.8Kfrom my offset. I still have capitalising of expenses but I don't pay interest on interest.
How does an argument with the ATO sound?
The above is risky enough strategy for me and some accountants even say that to have 100% peace of mind you should deposit the rent into LOC2.
My 2c
Rixter
You can do 1 and 2 with a LOC if you have the right package.
Can you expand on 3 and 4 please?
Thanks
Can you tell me which lender/s for 1 & 2?
3 /good for if you want to convert a non deductible PPOR to a IP and keep all the loan fully tax deductible.
4/ Because the funds drawn from the loan are placed into the offset account the bank looks at those funds in offset as savings.
It's the STGeorge portfolio but you are right
looking at the rates the interest is 0.1% higher than standard variable.
Thanks
Ziggy,
The annual interest rate of 20K is being generated from your PPOR is it not?
I dont think you can borrow to pay that bill as it is not a business expense. The idea needs to revolve around borrowing to pay IP running costs.
Maybe I'm not understanding your point clearly enough. Its very hard to be clear about these stuctures on an internet forum.
Welshman was not paying PPOR interest with borrowings but rather offsetting the interest with salary,rents, tax return money etc... He was paying IP costs from the LOC/Business offset acount and allowing the capitalisation to occur within that business account.
MJK
Do they allow you to fix a LOC rate tho?
Rixter
As far as I know you can fix any part of the STG portfolio
MJK
Yes it's hard to understand if you don't have access to the flow chart.
Anyway, as long as our accountant is happy with our structure we should be ok.
Cheers
I my opinion,
Thats why the money that goes into the offset must be rent/salary/dividend income rather than borrowed.
Borrowed money must be used to pay business related expenses as I see it.
See Welshmans attached PDF flow chart.
MJK
Mike, I have exactly the same question... I have thought that it might involve simply drawing down the loan into a dedicated offset linked to the the loan being drawn down from.
After meeting with comm bank had to set up a streamline account as money could not be controlled as I wanted in the offset account, came up with the final structure which I will run past my Perth Accountant before I go ahead. Got my eye on a couple of deals in the Perth market at min with the possibility of 15% growth which is local to me which I can make silly offers on whilst the market is like it is
Any comment or suggestions appreciated
Any comment or suggestions appreciated
Attachments
Hi,
I have had advice that I can put all salary, rent and dividend income into a line of credit off my PPOR which can then be used to pay for private expenses while I have another seperate line of credit account off the PPOR to pay for all investment property expenses including interest on the investment property.
My Accountant has concerns over whether the Account which the income is going into should be an offset account rather than a line of credit.
Any help would be good
I have had advice that I can put all salary, rent and dividend income into a line of credit off my PPOR which can then be used to pay for private expenses while I have another seperate line of credit account off the PPOR to pay for all investment property expenses including interest on the investment property.
My Accountant has concerns over whether the Account which the income is going into should be an offset account rather than a line of credit.
Any help would be good
Cramer
The set-up you describe in the first paragraph is perfectly legitimate. The reason that your accountant is suggesting an offset a/c (rather than the LOC) is that the money deposited in the offset a/c will save you interest on your PPOR loan, whereas money deposited in the LOC won't and the interest on the LOC used for personal expenses is also not deductible. What your accountant has suggested will result in your PPOR debt being paid off sooner - and the resultant increase in equity will be available sooner for further property or other investments.
Not all lenders offer full 100% offset accounts and some only offer these offset accounts with certain loan accounts. Before going down this path, check out - very thoroughly - any costs involved in changing loans and/or lenders to ensure that this approach is cost-effective for your particular situation.
Cheers
LynnH
The set-up you describe in the first paragraph is perfectly legitimate. The reason that your accountant is suggesting an offset a/c (rather than the LOC) is that the money deposited in the offset a/c will save you interest on your PPOR loan, whereas money deposited in the LOC won't and the interest on the LOC used for personal expenses is also not deductible. What your accountant has suggested will result in your PPOR debt being paid off sooner - and the resultant increase in equity will be available sooner for further property or other investments.
Not all lenders offer full 100% offset accounts and some only offer these offset accounts with certain loan accounts. Before going down this path, check out - very thoroughly - any costs involved in changing loans and/or lenders to ensure that this approach is cost-effective for your particular situation.
Cheers
LynnH
????
I've never had a LOC, but surely if you pay money into it you are reducing the balance and hence reducing the interest Lynn?
I would have thought the reasons to go offset rather than LOC would be contamination of loan (which is irrelevant in the PPOR / personal LOC) and control (bank can shut of a LOC).
The important thing is to keep that investment LOC clean.
I'm no accountant or broker, but I don't see why your accountant should be concerned about it.
I've never had a LOC, but surely if you pay money into it you are reducing the balance and hence reducing the interest Lynn?
I would have thought the reasons to go offset rather than LOC would be contamination of loan (which is irrelevant in the PPOR / personal LOC) and control (bank can shut of a LOC).
The important thing is to keep that investment LOC clean.
I'm no accountant or broker, but I don't see why your accountant should be concerned about it.
Hi s_t,
By depositing funds into your offset account - the interest that you save is put into the principle component outstanding on your homeloan - so depositing funds into your offset will help you pay off your homeloan faster.
Eg For a P&I loan with offset:
$200k loan - monthly repayments of $2000 including $500 paying off principal.
Deposit $50k into offset account - monthly payments remain $2000, including $850 paying off principal.
With a LOC - that $50k will only go against the outstanding balance of the LOC - the interest on the LOC saved will not go against paying off the Principal on your home.
Cheers,
Jen
General question for those using/in the know about this structure...
How does the bank view your situation once the PPOR has been "paid off"?
You'd obviously need to access a fair chunk of equity via the LOC(s) used to capitalize IP interest. Does the bank look at the offset account on the PPOR in your overall LVR?
Rory
How does the bank view your situation once the PPOR has been "paid off"?
You'd obviously need to access a fair chunk of equity via the LOC(s) used to capitalize IP interest. Does the bank look at the offset account on the PPOR in your overall LVR?
Rory
