Line Of Credit Example

From: Andrew G

Hi guys,

Just a query regarding the structure of a LOC. I have a home and IPs etc., but have never really known about LOCs. So from point 3 onwards I'm guessing ..... Would you set it all up like the following?

Theoretical Example :

1. I have a savings account with a bank - account 'a'.
2. I buy a house, P&I loan - account 'b'. Payments go from 'a' to 'b' each fortnight...
3. I setup a LOC, bank account 'c'. (I get a bigger LOC depending on equity in my house?)
4. I purchase an IP, I/O loan - bank account 'd' - rent gets paid by tenant/property manager into 'c' which the bank uses to pay regular interest payments to 'd' each fortnight etc.
5. I purchase another IP, I/O loan - bank account 'e' - rent gets paid via the same method as the last one, and it keeps going like this for as many IPs as you buy.

The above assumes you are starting from scratch, which I am not, but I'm still curious if this is the 'general' way people structure their bank accounts etc.

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Reply: 1
From: Rolf Latham

Hi Andrew

Not bad, pretty close though you may not require the extra cost and burdens imposed by LOC structures.

Commonly, if set up the right way you can do an offset home loan for the PPOR debt and a LOC on the home for IP deposits and costs. Or you could just go for both splits as being LOC based, though this may not suit if you want to convert your current PPOR to an IP later.


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Reply: 1.1
From: Anonymous

Hi there. I am very new to this but could you tell me if I'm understanding the process correctly using LOC.
If you have equity in your PPOR, you start up a LOC on your PPOR. Then you use some of the LOC to provide the deposit for your first IP. You have a mortgage solely on the IP, giving no cross-collateralization. From the LOC you pay all expenses. You then apply for a section 221D and put the extra tax rebate that you get each week into the LOC as a payment. I'm guessing you'd have to put a bit more cash into it each week to make up the repayments. The interest charged on your LOC is tax deductable. Is this right? And with the section 221D, does that apply to just your first IP or can you keep applying for a reduction for each IP?
Thank you o clever ones.
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Reply: 1.1.1
From: Projects .

My thoughts only.
Setup an offset account against your ppor mortgage and an LOC against the equity in your ppor. Then use the LOC for the deposit and expenses for your IP along with an IO loan for the balance of the IP secured against the IP. The rent and your salary goes into the offset account and you draw on this to make the payments against your loan when due. This has the effect of reducing your ppor mortgage at a quicker rate. The 15-15 variation on your paye income just means you have more going into your offset.


There is more than one way to climb a mountain.
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