IO with 100% Offset Vs Line of credit
- Thread starter seano87
- Start date
Pretty much the same thing.
The only difference is that the offset is considered transaction account so long as it is savings you can use this for personal expenses if it is against a IP and typically in hard times it is harder to close this off.
On a LOC....when you pull cash out on a IP it can only be used for investment purposes if you want to deduct interest. Also..as some people found out...LOCs can be closed off by the bank as some found during the GFC.
The only difference is that the offset is considered transaction account so long as it is savings you can use this for personal expenses if it is against a IP and typically in hard times it is harder to close this off.
On a LOC....when you pull cash out on a IP it can only be used for investment purposes if you want to deduct interest. Also..as some people found out...LOCs can be closed off by the bank as some found during the GFC.
Huge difference.
The LOC is a loan
The offset is a savings account.
The interest consequences of putting cash into the offset or the LOC would be exactly the same (assuming the same rate).
But with the LOC you would be paying down the loan whereas with the IO/Offset you wouldn't.
So the tax consequences are completely different.
You should only ever use a LOC to access equity.
Ideally you should never use a IO with offset to access equity
But, you should use a IO/Offset for storing all spare cash - but make sure the offset is against the non deductible debt so as to save you non deductible debt.
Why should you not use IO with offset to access equity. If the offset is solely being used to park the funds and not used, no withdraws or deposits until ready to use for IP purposes... can you please explain the risk involved.
I understand if you use the funds and mix purposes, but then wouldn't at be the same case if you started using the LOC.
2 main reasons
1. Cutting the direct connection between borrowing and using the funds to invest
2. ease of contaminating the borrowed funds by depositing into the account.
There is a PBR out there that says interest could be deductible, but best to use a LOC if you have a choice I think. Once it is drawn you can convert the LOC to IO loan.
I see where you are coming from, but I can't see anything wrong with setting up the IO loan straight away putting funds in seperate offset account and not touching the funds until ready to use for IP purposes.
You could just as easily contaminate the LOC the same as IO w/offset
I am a bit more worried about this issue than most. There is a PBR which says parking in an offset is ok. But I would never tell a client to set it up like this without the go ahead from their tax advisor.
I think this is the PBR Terry referring to.
http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm
I was in the same boat and arranged my equity release with new offset linked to new loan until i used that money for Investment purposes...(in my case it was in offset was about 20 mins)...I was very concerned reading few forums here that i've done it wrong....but reading this PBR and advise from my accountant has convinced me that I've not......
As someone has mentioned here the key is not to mix the offset money with personal use.....
Please seek advise from your accountant and get in writing...
I've just read that PBR.
The person purchased an investment property then drew down the loan with excess funds deposited into the offset. These offset funds were later redrawn to purchase another investment.
Many LOCs are "repayable on demand" IO term loans for 15 years say with 100 % offset are not
As with many things in lending,it aint a problem till it becomes a problem...........
ta
rolf
As with many things in lending,it aint a problem till it becomes a problem...........
ta
rolf
