Line of credit vs Top up split with offset

[Noodle]

This question is more out of curiosity than anything as I have never used a Line of Credit (LOC).

But I wonder in what circumstances would it be better to have a LOC set up for investment purposes as opposed to a stand alone top up loan with the equity held in an attached offset account?

 

[Rolf Latham]

This question is more out of curiosity than anything as I have never used a Line of Credit (LOC).

But I wonder in what circumstances would it be better to have a LOC set up for investment purposes as opposed to a stand alone top up loan with the equity held in an attached offset account?

some tax advisers dont like offset "borrowing" suspecting that the funds then used for investment may not be deductible ( see Domjan v ato). Locs dont have that issue

LOCs are also useful for capitalising interest

Biggest bug with locs is the common "repayable on demand" clause, and often lower lvrs

sometimes slighty higher cost
ta

rolf

 

[Pa1nter]

Biggest bug with locs is the common "repayable on demand" clause, and often lower lvrs

rolf

Repayable on demand?
What are the circumstances that could make this happen?

 

[Rolf Latham]

Repayable on demand?
What are the circumstances that could make this happen?

pretty much when the lender decides...............

job loss

their valuation test comes in low when they do a review

Liquidity crisis

the cat says so


LOCs arent my fave beast for borrowing large chunks, yet some credit advisers wont consider anything else than a portfolio based LOC.

ta
rolf

 

[Pa1nter]

pretty much when the lender decides...............

job loss

their valuation test comes in low when they do a review

Liquidity crisis

the cat says so


LOCs arent my fave beast for borrowing large chunks, yet some credit advisers wont consider anything else than a portfolio based LOC.

ta
rolf

Thanks Rolf,
Whats the downsides of turning Loc to normal investment loans,my portfolio based Loc is approaching 5 years old,is it normal for them to go over this time frame or should I change over on my own accord and my own terms.


Its just that I have a fair chunk of LOC money available and it is getting bigger all the time as rents go in,I would hate to wake up one morning and find my extra LOC money unavailable.

 

[Rolf Latham]

Thanks Rolf,
Whats the downsides of turning Loc to normal investment loans,my portfolio based Loc is approaching 5 years old,is it normal for them to go over this time frame or should I change over on my own accord and my own terms.

this product usually has no FIXED loan term.......................

Its not just LOCs that have weasel clauses, some redraw loans do too.

Read section 7 ...... and then tell me are we comfy to park OUR cash in there with those T%Cs ...............

http://www.ubank.com.au/ubank/ib/documents/uhomeloan-terms-conditions.pdf

Im a big fan of IO term loan with 100 % offset accounts so that your cash stays your cash.

There is no perfect solution, but eyes wide open folks.

Its just another part of your risk mitigation strategy

ta
rolf

 

[Terry_w]

Its just that I have a fair chunk of LOC money available and it is getting bigger all the time as rents go in,I would hate to wake up one morning and find my extra LOC money unavailable.

Why are you rents going into a LOC? This could be a deductibility nightmare.

Best to have the rents go into an offset account. LOC should be just used for paying deposits and, perhaps, paying expenses of an investment nature.

But, after the LOC has been built up a bit it is a good idea to convert at least part of it to an interest only loan.

 

[Aaron_C]

But I wonder in what circumstances would it be better to have a LOC set up for investment purposes as opposed to a stand alone top up loan with the equity held in an attached offset account?

Different strokes, really. Usually LOC is more expensive.

 

[Noodle]

Thanks guys, and that Domjan case is a little scary as a precedent. Imagining ALOT of people could easily come unstuck if the ATO wanted to be really awkward.

 

[Pa1nter]

Why are you rents going into a LOC? This could be a deductibility nightmare.

Best to have the rents go into an offset account. LOC should be just used for paying deposits and, perhaps, paying expenses of an investment nature.

But, after the LOC has been built up a bit it is a good idea to convert at least part of it to an interest only loan.

I have a different account for each property,any incoming and any outgoing from that property is in that account,
The actual LOC is separated into several accounts/properties as well as having a 100% offset account where my daily living expenses and income goes in.
Could this be a problem and why?
I was under the impression this was the correct way to do it??
The reason the LOC has built up is because a couple of the properties are positive,one returning around 38%.
Now you have me curious?

 

[Terry_w]

I have a different account for each property,any incoming and any outgoing from that property is in that account,
The actual LOC is separated into several accounts/properties as well as having a 100% offset account where my daily living expenses and income goes in.
Could this be a problem and why?
I was under the impression this was the correct way to do it??
The reason the LOC has built up is because a couple of the properties are positive,one returning around 38%.
Now you have me curious?

Do you ever take money out of these LOCs?

 

[Pa1nter]

Do you ever take money out of these LOCs?

Only to pay the insurances and outlays from each individual property,

 

[Terry_w]

Only to pay the insurances and outlays from each individual property,

You might be ok then. But you are tying up money which cannot be used for personal expenses without tax complications. Add to this the higher rate for the LOC and added risk of it getting called in.

Why not use an IO (or even PI) loan with a 100% offset.

I assume you have a PPOR fully paid off and no personal debt?

 

[Pa1nter]

You might be ok then. But you are tying up money which cannot be used for personal expenses without tax complications. Add to this the higher rate for the LOC and added risk of it getting called in.

Why not use an IO (or even PI) loan with a 100% offset.

I assume you have a PPOR fully paid off and no personal debt?

I have my PPOR fully paid off and do not have any personal debt.
I was thinking of changing the LOC to something in your way of thinking mainly because this financial quarter for me is slow so far and with a fair part of last year off with injury,my income for this financial year will be a lot lower than normal,maybe will ring some alarm bells with the bank when I get my tax done.Better to do it myself than be forced by the bank.
Thanks for your input and advise it is greatly appreciated,

 

[kamchatsky]

Sorry to bring up an old thread, but my broker is proposing me to use LOC to pay for deposits for IPs to avoid crossing. However we are concerns with risks of LOC compare to say standard IP loans. Does each bank have different "repay on demand" clauses? How often do banks ask investors to repay LOCs? I am trying to avoid crossing my PPORs to the IP so I am trying to work out the best way to avoid crossing but also not using LOC.

 

[Mick C]

Sorry to bring up an old thread, but my broker is proposing me to use LOC to pay for deposits for IPs to avoid crossing. However we are concerns with risks of LOC compare to say standard IP loans. Does each bank have different "repay on demand" clauses? How often do banks ask investors to repay LOCs? I am trying to avoid crossing my PPORs to the IP so I am trying to work out the best way to avoid crossing but also not using LOC.

Sorry your post is a bit confusing

1. Crossing the loan or not got nothing to do with LOC Vs offset....you can still have a "crossed " loan if you have a offset or a LOC...

2. If you don't like the LOC, why not apply for the standard loan + Offset- unless it was for a "credit/approval reasons/ planning reason"

3. It "sounds" like you have a LOC split on your PPOR..if that;s the case it's fine to use the LOC to pay for the IP ( that's the point of having the split).

 

[kamchatsky]

OK just to clarify a bit:

- PPOR has 480K loan worth 950K-1M
- Just bought new 580K IP

I am looking at borrowing 100% against 580K IP by using some equity from PPOR. Don't want to cross the loans. So broker suggest setting up LOC for 20% + stamp duty + lawyer costs (approx 134K), and then borrow 80% of IP using standard loan.

My worry is that LOC has "repay on demand" clause hence my question whether the banks can just take LOC or force me to sell the IP sometime in the future to pay for LOC. Or I should just take out an investment loan for 134K against PPOR , and then have separate standard IP loan for 80% of IP value (464K) to avoid crossing?

 

[Terry_w]

Sorry to bring up an old thread, but my broker is proposing me to use LOC to pay for deposits for IPs to avoid crossing. However we are concerns with risks of LOC compare to say standard IP loans. Does each bank have different "repay on demand" clauses? How often do banks ask investors to repay LOCs? I am trying to avoid crossing my PPORs to the IP so I am trying to work out the best way to avoid crossing but also not using LOC.

This is how I recommend clients to borrow. The LOC is the best way to avoid potential tax issues (I advise against borrowing and parking in a offset) and the LOC can be converted to a term loan once it is drawn down. I provide this advice to clients as a solicitor from my law firm

 

[Terry_w]

+ lawyer costs (approx 134K),

Lucky lawyer!

My worry is that LOC has "repay on demand" clause hence my question whether the banks can just take LOC or force me to sell the IP sometime in the future to pay for LOC. Or I should just take out an investment loan for 134K against PPOR , and then have separate standard IP loan for 80% of IP value (464000) to avoid crossing?

Have you actually read the "repay on demand" clause? Or are you going on rumour or speculation? What is the wording?

If you take out an 'investment loan' it may work, but only if you can drawn a cheque on this account. If you can't you may have to drawn down funds into a savings account and that is when the risks start. I have had clients who have done this and inadvertantly ruined deductibility by mixing funds.

 

[kamchatsky]

Lucky lawyer!

Nah, lawyer alone does not cost that much. That figure obviously includes 20% of house + stamp duty + fees.

Have you actually read the "repay on demand" clause? Or are you going on rumour or speculation? What is the wording?

I will need to find out more on this, but I have heard people talking about this so I need to do more investigation. As you know all the important information are in the fine print and most people don't even bothered to read them. Hence question to somersofters to see what is the general experience is like.

If you take out an 'investment loan' it may work, but only if you can drawn a cheque on this account. If you can't you may have to drawn down funds into a savings account and that is when the risks start. I have had clients who have done this and inadvertantly ruined deductibility by mixing funds.

What do you mean by this? The proposed 134K IP loan has separate offset account completely separated from my PPOR offset. Do you mean mixing funds from PPOR offset?