Life with a LOC, does it make sense?

Hi all

Thanks to the inspiration of this forum, I think have made my first moves towards my first IP. In the past couple of weeks I have changed from a standard P&I home loan with ANZ to their Equity Manager LOC with the BreakFree package.

After valuing my PPOR, they offered a $210K LOC, so after taking off the original $125K that I still owed on my other mortgage, I have $85K available in the LOC to use as a deposit on an investment property. My intention is to finance the remainder from another source to avoid cross collateralisation (yes?no?)

The part that freaked me out I guess is that the way they have set it up, I only have the LOC account, and a credit card account. So all deposits and withdrawals, direct debits etc go straight to the LOC account. Thats a bit scary in my books as it would be easy to loose track of spending and eat away at that LOC that is meant for investing. Not sure I want to live with a LOC like that.

When I asked the bank manager how I could set it up so I could keep the interest on any part of the LOC used for investment separate so I can claim it on tax, he assured me my accountant would know how to work that out.

I know with the BreakFree package you are supposed to be able to set up five loan accounts, and I thought that is what they would suggest. To be honest, I dont know how familiar with the products they are.

Does this set up seem right? Appreciate hearing from anyone else with LOC, esp. ANZ and BreakFree.

After this is sorted out, on to the next step, looking at places.

Thanks

Cam
 
My own experience of LOC is that they are difficult to keep on top of, it sometimes seems all too easy to withdraw a little bit more of what's available to pay those bills or buy that new thingy. As a result instead of the debt steadily decreasing as it would with P+I loan, or staying level as it would with an interest only loan, it often increases. This would be more a matter of budgeting discipline though so would vary from person to person.
 
4GH1RH said:
Thanks to the inspiration of this forum, I think have made my first moves towards my first IP. In the past couple of weeks I have changed from a standard P&I home loan with ANZ to their Equity Manager LOC with the BreakFree package.

After valuing my PPOR, they offered a $210K LOC, so after taking off the original $125K that I still owed on my other mortgage, I have $85K available in the LOC to use as a deposit on an investment property. My intention is to finance the remainder from another source to avoid cross collateralisation (yes?no?)

The part that freaked me out I guess is that the way they have set it up, I only have the LOC account, and a credit card account. So all deposits and withdrawals, direct debits etc go straight to the LOC account. Thats a bit scary in my books as it would be easy to loose track of spending and eat away at that LOC that is meant for investing. Not sure I want to live with a LOC like that.

I am not an accountant but I don't understand why the bank did this because it breaches one of the basic rules of investing - that is, keep investment monies completely separate from your personal monies. The loan to purchase your PPOR is personal monies, interest paid in not tax deductible - the loan to purchase your IP is investment monies and interest paid is tax deductible. The bank has successfully combined them into the one loan - I would have thought it wise to keep both loans separate.


4GH1RH said:
When I asked the bank manager how I could set it up so I could keep the interest on any part of the LOC used for investment separate so I can claim it on tax, he assured me my accountant would know how to work that out.

Of course they would say that - ask them if they will pay your accountant's bill for you. :D :D


4GH1RH said:
I know with the BreakFree package you are supposed to be able to set up five loan accounts, and I thought that is what they would suggest. To be honest, I dont know how familiar with the products they are.

Does this set up seem right? Appreciate hearing from anyone else with LOC, esp. ANZ and BreakFree.

I don't have a Breakfree package so I can respond to these questions with direct experience. If Breakfree allows up to five loan accounts, then I would have thought you would need to set up at least two accounts at the start - one for the loan on your PPOR and one for loan on your (still to be purchased) IP - that is, each loan would need to be drawn against the correct account to separate your investment monies from your personal monies. Then, when making deposits, you would need to ensure that you are depositing into the correct account (in most cases, your PPOR loan account).
 
I love my LOC!

Got it in the early eighties. At the time I had a pile of small leases with their attendant costs. Enter Standard Chartered!

Got the LOC, payed out my private mortgage and to this day the only "after tax" interest I've paid is on my Lady's car. Paid out the leases, and all new equipment purchases thereafter were by cheque.

The best bit is that the agreed rate was 30day bank bill + (x)%. In the late 80's when mortgage int rates nudged 20%, my LOC never went beyond 14%.

All good things come to an end and Custom Credit (I think) bought them and were hopeless. Now with Macquarie but it still works for me. But when it comes to spending money I'm as tight as a fish's bum and can keep private and biz expendatures separate. Of course I have "drawings".

My LOC has increased with revaluations but I now have a share portfolio which could pay it out. 10 out of 10 for LOC!

T

ps This could NOT have happened without real equity in my PPOR.
 
Hi 4G

Kieran has it very right in my view.

Id separate my current PPOR debt and new IP debt.

Indeed if using the ANZ product id go for

1. For the PPOR bit
HVC loan, 125 000 10 years Interest only,

To that loan I would link the ANZ one acct, my daily savings and spending acct, a 100 % offset act

2. For the IP bit
Loan code RN, Equity Manager 85 000.


The reason why the branchie wanted you to take a combined 210 k loan at 6.57 is that the rate for the above structure are 7.07 and thats expensive.


Kieran will tell you that Suncorp in QLD will likely do those loans at 6.57 or so because they use a relationship based discount model.

I suggest you take this info to your ANZ person and ask them to help you to help themselves. If they cant/wont then many a broker will be able to help you do the right thing for your future

ta

rolf
 
Using a LOC for personal and investment purposes is no problem whatsoever.

You will need two (or 3) things:

1..Disclipline

2..2 different colored highlighters.

In the past, I (and other business colleagues) have used a personal LOC as a business overdraft facility in times of tight cashflow for a business. Beats a bank business overdraft hands down and never had a problem accountant/ATO wise.
 
Loc

Another way is to set up 2 LOCs and use one for business and one for personal expenses. Thats just what I did but have only just started so cant offer any advice about how well it will work.
 
likewow said:
Using a LOC for personal and investment purposes is no problem whatsoever.
.. except when you make repayments on the LOC that reduce the principle, so, was that repayment reducing the investment portion of the LOC or the PPOR portion??? What you think you are paying down and what ATO consider you are paying down can differ.

Don't make it hard for yourself, always use separate accounts. (I know this from experience having made this dumb mistake in the past :eek: )
 
I suppose it is so simple for me because I have no personal debt. The ATO expects, indeed insists, that I draw a livable wage from my business so when I pay a private account it is just "drawings". The outstanding amount on the loan increases and some interest would be attributable to that transaction but the business still pays 100% of the interest. My wife's pay goes in as "reverse drawings" and reduces interest paid. No probs!

T
 
mdk92 said:
.. except when you make repayments on the LOC that reduce the principle, so, was that repayment reducing the investment portion of the LOC or the PPOR portion??? What you think you are paying down and what ATO consider you are paying down can differ.

Don't make it hard for yourself, always use separate accounts. (I know this from experience having made this dumb mistake in the past :eek: )

OK, say i have a $300k LOC avalaible. For simplicity sake say that 200k is drawn for IP expenses and 100k is drawn for personal/whatever.

The total interest payment is 19.5k pa. So 2/3 of that amount is tax deductible one and one third isnt so you dont claim that part portion.

As far as paying down, the LOC is a perpetually revolving line of credit with repayments as interest only, it is never paid down, it just goes up and down and the repayments calculated according to the balance.

The tax deductibility isnt related to the security for the LOC, it is determined by the use of the funds and as long as you dont claim the 'personal' component of interest payment as tax deductible, its no prob Bob.

Its not hard for myself, in fact its very easy :)
 
Likewow,

As a 'revolving line of credit', do you calculate on a daily basis the % of personal & percentage of business borrowings?

If money is going in and out I can't see how your system would be easy to manage.

Every day you'd have to recalculate the % investment versus personal debt.

TOO HARD - plus you have the example of that woman doing a similar thing & having the ATO disallow it....why take the risk?

Seems like you're looking for shortcuts

Cheers,

Aceyducey
 
likewow said:
OK, say i have a $300k LOC avalaible. For simplicity sake say that 200k is drawn for IP expenses and 100k is drawn for personal/whatever.

The total interest payment is 19.5k pa. So 2/3 of that amount is tax deductible one and one third isnt so you dont claim that part portion.

As far as paying down, the LOC is a perpetually revolving line of credit with repayments as interest only, it is never paid down, it just goes up and down and the repayments calculated according to the balance.

The tax deductibility isnt related to the security for the LOC, it is determined by the use of the funds and as long as you dont claim the 'personal' component of interest payment as tax deductible, its no prob Bob.

Its not hard for myself, in fact its very easy :)
as I said though, its only OK if you dont pay off any principle. Are your circumstances such that you would not want to pay off any of the PPOR debt? Even if that is your current situation, why build that into your loan structure if it can easily be avoided?
 
mdk92 said:
as I said though, its only OK if you dont pay off any principle. Are your circumstances such that you would not want to pay off any of the PPOR debt? Even if that is your current situation, why build that into your loan structure if it can easily be avoided?

Firstly i dont have any PPOR debt and secondly the LOC is a standalone loan thats not connected to a property. Well it is but only as far as the security for the LOC is a few IPs, which are interest only loans which are completely separate from the LOC loan. The LOC is never paid off, as stated previously it constantly exists at different balances, its purely a revolving line of credit.
 
likewow, my own bitter (expensive) experience is that mixing non-deductable debt (PPOR or whatever, it doesn't matter) with deductable debt in one loan is a very bad idea if any payments are ever made to vary the principle (ie a repayment other than the exact monthly interest bill). If your experience differs then more power to you.
 
semi related.....

Banks give loan advice
Financial planners give advice on, um, something :confused:
Accountants give tax advice

This is a tax question, make sure you are getting advice from the right place, I originally took advice on this exact loan structure question from a financial planner... doh ! :(
 
We have two LOCs and keep them separate. We have an investment LOC used solely for IP expenses - all rent goes in, bank takes interest out and we pay all IP expenses from that account. Our salaries go into a separate LOC for private use and if necessary we transfer money across to the investment LOC e.g. when rates all fall due at the same time.
Shirley
 
Glad to have sparked some discussion, seems I am not entirely alone.

I am not comfortable with the single line of credit, so I will approach the bank and re-iterate my concerns and see if I can split them somehow.

I think I'd even be happier if I just had a transaction account to separate day to day transactions from the LOC. Otherwise it seems like a delicate balance to not overspend, and not pay off principle.

Overall I am happy with the LOC idea and the flexibility it offeres, but will be happier if I can modify the structure a bit to make it easier to manage.

Thanks all
 
4GH1RH said:
Glad to have sparked some discussion, seems I am not entirely alone.
I am not comfortable with the single line of credit, so I will approach the bank and re-iterate my concerns and see if I can split them somehow.
IThanks all

If my accountant found out about this he would strangle the ANZ guy! and I would probably join in.

Uhhh! never listen to anyone in a bank (especially call centres) when you have a bank related issue!

Never ever ever ever ever ever ever ever mix personal debt and investment debt! Yes, your accountant can work it out, but at $120/hr why would I want to keep him busy for a week. And besides, the ATO will still be very unimpressed with you.

I have 3 almost dormant transaction/ CC accounts (all with montlhy account fees) just so I can seperate my expenses cleanly. Each costs me $60/yr but it is worth it.

Demand the bank restructure your accounts imediately! Do not delay! Check out this forum for some ideas on workable structures.

Regards,
John
 
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