Life with a LOC, does it make sense?

[voodoo]

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

This sounds ok to me,
As the bank has given you a LOC on the equity of your PPOR. You do not own an IP as yet, so when you decide to purchase then you will take out a Sub Account for the full amount. That acc may be IO and you will never draw from it.
The rent from the IP goes into the LOC on PPOR and auto transaction from LOC each mth to pay interest on IP.

It is this simple and I could not live without my LOC, it is great.

 

[Rolf Latham]

Hi Voodoo

Sounds like you practice cross collateralistion ?

ta

rolf

 

[Janfan]

4gh1rh

hi

I have an ANZ breakfree package

LOC on PPOR use for deposits and purchase costs,including improvement items -non tax claimable for repairs


IO loan on IP - with offset takes rent and claimable expenses

salary etc in separate accts 1 for me 1 wife

rates 6.57%

no acct fees , annual fee, but free valuation
probably a bit elaborate but no costs with ANZ package and makes upkeep quite easy path clear for ATO - although I must admit this hasn,t been tested yet


Janfan

 

[Carimwell]

My understanding of the Sunday Mail article is that there are two problems that arise when mixing personal and business(ie investment) funds, such as in a single LOC. One is that, if challenged by the ATO, you have to be able to PROVE absolutely that every single dollar you are claiming interest on was used for business purposes, not personal. Second, if you put ANY money back into the account, which reduces the outstanding LOC amount, that is regarded by the ATO as repayment of principal, so when you draw it out again, that is effectively a new borrowing and again, you have to prove your redraw was not used for personal expenses otherwise you can't claim the interest on it.
JIM

 

[likewow]

4gh1rh

hi

I have an ANZ breakfree package

LOC on PPOR use for deposits and purchase costs,including improvement items -non tax claimable for repairs


IO loan on IP - with offset takes rent and claimable expenses

salary etc in separate accts 1 for me 1 wife

rates 6.57%

no acct fees , annual fee, but free valuation
probably a bit elaborate but no costs with ANZ package and makes upkeep quite easy path clear for ATO - although I must admit this hasn,t been tested yet


Janfan

I think maybe you guys are getting confused with an important point. It doesnt matter what security the LOC has, its the use of the LOC funds that matter to the ATO.

So when you say 'LOC on PPOR' do you mean it is secured by your PPOR?

 

[Carimwell]

That's right LikeWow.

You have to be able to prove that the purpose of every $ you take out of the LOC is for busines/investment use. It doesn't matter that the LOC is secured against your PPOR.

Perhaps Dale or Rolf could confirm the following. If you have a LOC of say $100,000 which you are using for investment, you can claim 100% of the interest. But if you put $10,000 back into the LOC account, that's repayment of principal, so you are charged interest then on $90,000, and that's what you claim. Now you redraw that $10,000 and use it for something personal. You can't claim the interest on that $10,000, only on the $90,000. Fair enough. The problem arises when you again deposit $10,000 in your LOC. The ATO regards that as another repayment of principal - not the $10,000 you redrew, but the $90,000 you are still claiming interest on - so now you can only claim interest on $80,000, even tho you have a $90,000 debit. Redraw and repay a few times and your claimable interest continues to fall even tho your outstanding balance doesn't. That's the problem mixing personal and business in one account. Have I got this right, or am I painting the ATO in too harsh a light?
JIM