Line of credit query

Firstly, as this is my 1st post here let me say thanks to you all... I've read many different posts here about investing in property and have learned lots from you all so thankyou!

So. I own a townhouse (PPOR) and have a unit too (IP). I have just seen a financial adviser and he has given me some advice. I thought I'd post here for 2 reasons.. Firstly, I would be interested to hear of others who have followed this advice and what their opinions are about it and secondly, it may be of help to others in the same position as me and looking for a different strategy.

Here's a combination of what the FA have proposed and my thoughts mixed in. My component will be flawed in some way, and that's another reason I am asking for help here.

1. replace conventional mortgages on PPOR and IP with a LOC

2. during (1), get properties revalued by bank so LOC is 80% of current values

3. put money from offset account into PPOR LOC [along with income, tax returns, coins in car etc] and redraw into a 3rd LOC account

4. use money from 3rd LOC for investment purposes only:
4a. buy ASX top 50 shares [adviser will create/modify portfolio] - dividends paid into PPOR LOC to pay it off ASAP
4b. redraw each month [or other frequency if better] from PPOR LOC into 3rd LOC, $ cost average more shares
4c. take a 10% deposit from 3rd LOC for another IP
5. obtain 90% finance for 3rd IP [accept LMI if required as paying it will not cost anything over about a 3 year period]
6. keep all this going for a few years and then hopefully buy a bigger home
or reach a point where all the non-deductible debt is now deductible

What do you think? Up till now I have been paying off the PPOR ASAP which has been great but this set up seems a little smarter - ie, the interest on the "investment LOC account" will be tax deductible so will cost me about 3.5% (am on highest tax rate). Even if the stock market is up and down, I think breaking even is a pretty safe bet and fingers crossed it does much better than that! And, being a LOC there are no margin calls

My thinking re LMI - it's a 1 off cost, tax deduct, and means you only need say 10% deposit. If it is capitalised onto the IP loan then it increases your interest deductions and the other 10% would be invested into shares and putting income on the PPOR LOC.

Confused? Me too! I know it's a little different for this IP forum but thought others may find the proposed LOC plan interesting.

Any thoughts would be appreciated!
Thanks,
Graham73http://www.somersoft.com/forums/images/smilies/smile.gif
 
Welcome!
This sounds like debt recycling, and is covered in quite a few posts you could search on.
It is a tax effective way to save money, however like anything, dont do something just for the tax benifits. Scrutinise any potential investment carefully without regard to the tax benifits. Your comment about even if the stock market is up and down worries me a little. If I was buying stock, I'd also investigate covered calls and other hedging strategies (which might also be tax deductable) and make sure I was as well informed as possible, with the best possible adviser.
Good Luck!
 
Hi Tobe,
Many thanks for the reply and for giving me the "key words" "debt recycling". I did a search on this forum and on the net and gained lots of great information about this technique.
Stops sound like a good idea too, I'll definitely consider using them, although they may be triggered next time someone enters a b instead of an m! (Wall St today).
Thanks again,
Graham
 
all the loans on LOC is a bit of a warning for me though.

not needed.............usually

You can have the bulk of the debt on IO term loan with 2 x 25 k LOCs or so to do the debt recycle.

Critical here then is the choice of lender that will allow regular limit juggles without much hassles

ta
rolf
 
Welcome Graham,

Some great advice and to add to what Rolf has said, I hope you can control your spending. LOC's can be one of the riskiest things a person can do if one does not have control over one's spending habits. If you have a spouse and children - make sure the kids don't know about it and make sure the wife is not thinking about a new car.;)

You'll want to have heads up on all the fees and interest rates tied into these LOC's.

Regards JO
 
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