Line of Credit vs Offset Account

[G&G]

I have been reading some books and they recommend utilising a line of credit instead of an offset account. To date I have used an offset account to reduce the interest payable on my investment loan whilst still having the money available for expenses as they arise. Why would it be more beneficial to place all you money into the loan where you can not draw on it and then redraw from the line of credit paying interest?

Cheers G&G

 

[Rolf Latham]

Hiya

In my opinion an offset acct is superior to a loc - reasons

1. Preservation of future tax benefits under many circumstances not available to LOC
2. Sometimes lower rates
3. Better Control of your spending habits
4. LVRs up to 97.1 %, vs typical 80, rarely 90
5. Usually no annual or 3 yearly reviews
6. Usually no "repay on demand clause"

Benefits for LOC are that its IO for the full term of the loan, thats about it.

ta

rolf

 

[Aceyducey]

G&G,

Bear in mind that offset accounts & LOCs are used for different purposes.

For example if you have a mortgage on your home an offset account is a useful way of reducing interest payments while retaining liquid access to your cash.

If you then wanted to purchase an IP using the equity in your home as your deposit & costs (and borrow against the IP for additional purchase funds), you may take out an LOC over any excess equity.

By using an LOC you then have the time to find the right IP (or IPs) without incurring interest until you need to pay the costs on the IP you select. This also keeps the investment debt separate from the personal debt.

Moving forward, you may use the LOC approach over an IP if there are excessive break costs or other issues which make it more expensive to increase your loan on the IP to fund additional IPs.

Of course you can always pay your cash back into an LOC to minimise the interest, and draw it out again as needed.

LOCs are also useful for locking in your available equity in case home values decline or lenders tighten their criteria. You don't have to use the LOC straight away & pay minimal costs for an undrawn facility, but it's there when the bargains turn up & you need to access cash fast.

An offset account may let you also do this also, but you may not be able to lock in the additional CG on the property

Cheers,

Aceyducey

 

[Rolf Latham]

Hi Acey

Very true, LOC on IP isnt as much an issue as it is with PPOR

One can achieve a similar but clunkier result with a with decent Offset product you can have the same effect, 100 % offset against an Interest only loan.

A great example is where someone has low equity and needs a 95 % refinance to access funds for use in the future, the loc product wont go to that LVR but an I/O Offset acct may.

ta

rolf

 

[stargazer]

Hi all

How does a offset account actually work. I have heard neagative comments about them with fees and minimum withdrawls etc.

I have been told LOC are far better.

As Rolf shows LOC is limited in its benefits. But great flexibility for IPs as indicated.

Would appreciate an explanation

Regards
BC

 

[Mikhaila]

G&G

Offset & LOC can be used together as briefly mentioned earlier. Offset is useful with PPOR, and LOC with IPs or in fact any other investment vehicle(s) . LOC usually (not always) created form excess of equity and offset form cash you already have/earned. All investment expenses paid from LOC, and non-business from offset. This is important as it helps to separate business and personal spending and in turn helps you to maximise PPOR offset.

M.

 

[Humble]

Hi all. I have been learning this thread with gread interest, since I have been using just one saving account to service both PPOR and IP loans . I do have logistic problems in separating tax-deductibles from non-deductibles, as well as in having access to large cash reserve for deposit for new IP (I used redraw on PPOR loan ).

While I still owe money on the PPOR, is this the most optimal setup?

(1) PPOR and personal non-tax-deductible affairs
- Have an offset account linked to the PPOR loan
- All salaries goes to this offset
- Personal bills, personal purchases and loan repayment are paid from this offset
- Credit card linked to offset

(2) Investment (IP, shares, etc.)
- Set up a LOC
- All rental and dividents are paid into this LOC
- IP interest, IP bills and capital for share trading are paid from this LOC
- Should I have a separate credit card for IP bill payment linked to this LOC or can I use the credit card linked to offset?

As I can pay off the PPOR within next year, how should I structure the accounts thereafter?
- Keep or get rid of the offset?
- Where does the salary go to?
- How to get large money for personal use, such as changing car?

Humble

 

[Rolf Schaefer]

Hi Humble,
I would also pay all rental income and dividends into the offset which is linked to your PPOR thus maximising the Offset.

Once you have repaid your loan for the PPOR establish a new loan against PPOR (always within your serviceability limits) and park funds in Offset. You can use these funds for personal use. You could also use these funds for further IP purchases (deposit or costs) unless you have enough equity in your existing IPs to draw on and make payments from there.

 

[stargazer]

Hi all

Rolf if you park rental income etc into your PPOR LOC or OFFSET a/c then the IP loan would capitalise.

Is one able to do that now.

regards
BC

 

[LUNAR]

Hi all,

This is my first post, so I'll try and get the stupid questions out of the way early Here's an easy one to start with :

Are offset accounts interest bearing ?

Thanks.

 

[Aceyducey]

Are offset accounts interest bearing ?

Not to my knowledge.

But consider this this way....you pay around 7% interest on your loan...

You save this interest by having your money in the offset account.

Therefore you are earning 7% interest on your money.

Beats having your money in a saving account.

Cheers,

Aceyducey

 

[Rolf Schaefer]

and this way the "interest earned" is tax free.

 

[Rolf Latham]

Hiya

Just to add to that, for someone on a marginal tax rate of 48.5 that means an effective rate of 14 % with first mortgage security on a standard 7.07 variable rate - pretty good ?

ta

rolf

 

[havanfun]

And then when u spend that money from your offset account on personal items, your deductable interest increases again.

 

[Aceyducey]

And then when u spend that money from your offset account on personal items, your deductable interest increases again.

haveanfun,

The point is to NOT do that

If you don't have the discipline, don't get in the water.

Cheers,

Aceyducey

 

[havanfun]

Aceyducey,

What about when you retire and have to pay for living expenses. My point was that then it is better to park in an offset account rather than paying off loans, then withdrawing later and having no deductable interest.

Swimming fast

 

[havanfun]

Aceyducey,

You have to spend money some time and it sure beats paying off your mortgage, then spending and not having any deductable interest. That was my point.

Swimming fast.

 

[Aceyducey]

What about when you retire and have to pay for living expenses. My point was that then it is better to park in an offset account rather than paying off loans, then withdrawing later and having no deductable interest.

havanfun,

Depends on whether you're playing a tax minimisation game or a wealth creation game

Personally I play the second.

For your way of thinking, if you pay off a property that means you can borrow more for another property - more deductible interest

Cheers,

Aceyducey

 

[Tasman]

Hi Humble,
......
Once you have repaid your loan for the PPOR establish a new loan against PPOR (always within your serviceability limits) and park funds in Offset. You can use these funds for personal use. You could also use these funds for further IP purchases (deposit or costs) unless you have enough equity in your existing IPs to draw on and make payments from there.

Hi Rolf,
I have re-read your above recomendation for using an IO variable rate loan with offset savings account for private and investment purposes rather than LOC. I understand that an IO loan may access more of your property equity up to 97.5%, and in some instances may have lower interest charges against the outstanding balance. Your suggested strategy is to fully draw the IO loan into the offset account and then use the offset saving account funds for whatever purpose you may have.

My puzzelment is once the funds are in the offset savings account no interest is directly associated with this account (from an ATO perspective) when you pay IP expenses. How can you claim interest deductablity on expenses paid from a savings account.

cheers

 

[mckennal]

Hi Rolf,
My puzzelment is once the funds are in the offset savings account no interest is directly associated with this account (from an ATO perspective) when you pay IP expenses. How can you claim interest deductablity on expenses paid from a savings account.

I have an offset account attached to an IO loan.

The way I see it is when you spend money on IP expenses, your saving account balance goes down by that amount, and your interest bill goes up, thus the interest is a tax deduction - because the interest you are paying is on the IP's loan. So you aren't actually claiming a deduction for the interest on paying IP expenses, but instead its interest on the IP itself. Either way, it is a direct tax deduction, and either way you are maximising the claimable interest owed.

Hope that helps.
Luke