Line of credit with offset facility predicament

[Neptune]

Hello Folks,

I was hoping someone could give me some advise with a line of credit loan that I recently got setup using the equity in my home. I own my home outright and got a LOC loan approved for 80% of the value of my property.
We are staring our IP journey and settle on an IP at the end of January. I am planning on using the LOC to pay 20% plus buying costs (avoiding LMI) and have secured a separate loan with another lender for the other 80%.

As we own our home outright and therefore have no other mortgage against it and have surplus cash in savings (more than the amount of 20% plus borrowing costs) then I wasn't planning on using our savings and instead drawing down from the LOC.
However I was going to park our savings in an offset account linked to the LOC (until we need it in a few years) and thereby effectively not pay any interest on what we initially draw down from the LOC account.

I asked our mortgage broker to find us a LOC loan with an offset facility. He picked the ANZ Breakfree home equity loan for us and arranged all the paperwork. He assured us it had an offset facility and told me to arrange for a transaction account to be setup and link it to the LOC.
However, when I went to the branch to setup the transaction account they said the LOC didn't allow an offset account to be linked to it. They also confirmed this to me on the phone too.

So my predicament now (as we settle at end of Jan) is that I don't want to use our own cash for the 20% plus costs but if I draw down from the LOC then I will be paying interest on the amount for 20% plus buying costs which doesn't make sense if we already have this amount of cash earning low interest in another bank account. How can I offset it so I don't pay any interest?

I believe the LOC is both a transaction and loan account in one facility so if I just put this cash into the loan account and withdraw it for personal use in a few years then I will be mixing investment and personal use in the one account which I was hoping to avoid.
I did notice that the ANZ breakfree pacakge has a split loan facility but not sure how to effectively use that for this situation.

Any advice on how best to set this up would be most grateful.

 

[Rolf Latham]

Hiya

LOC by def doesnt have offset.

A financially similar outcome for you can be to attach and offset to the 80% loan assuming thats variable loan.

if thats not emotionally great, then use a variable split on the home for the 20 % you have just spent and park offset against that.

FWIW, im not a big fan of LOCs period, and will only use them where I have no option OR I need to capitalise interest

All in all, its a speed hump that your MB and you can work through

ta
rolf

 

[ZachAnSel]

Hello Folks,

I was hoping someone could give me some advise with a line of credit loan that I recently got setup using the equity in my home. I own my home outright and got a LOC loan approved for 80% of the value of my property.
We are staring our IP journey and settle on an IP at the end of January. I am planning on using the LOC to pay 20% plus buying costs (avoiding LMI) and have secured a separate loan with another lender for the other 80%.

As we own our home outright and therefore have no other mortgage against it and have surplus cash in savings (more than the amount of 20% plus borrowing costs) then I wasn't planning on using our savings and instead drawing down from the LOC.
However I was going to park our savings in an offset account linked to the LOC (until we need it in a few years) and thereby effectively not pay any interest on what we initially draw down from the LOC account.

I asked our mortgage broker to find us a LOC loan with an offset facility. He picked the ANZ Breakfree home equity loan for us and arranged all the paperwork. He assured us it had an offset facility and told me to arrange for a transaction account to be setup and link it to the LOC.
However, when I went to the branch to setup the transaction account they said the LOC didn't allow an offset account to be linked to it. They also confirmed this to me on the phone too.

So my predicament now (as we settle at end of Jan) is that I don't want to use our own cash for the 20% plus costs but if I draw down from the LOC then I will be paying interest on the amount for 20% plus buying costs which doesn't make sense if we already have this amount of cash earning low interest in another bank account. How can I offset it so I don't pay any interest?

I believe the LOC is both a transaction and loan account in one facility so if I just put this cash into the loan account and withdraw it for personal use in a few years then I will be mixing investment and personal use in the one account which I was hoping to avoid.
I did notice that the ANZ breakfree pacakge has a split loan facility but not sure how to effectively use that for this situation.

Any advice on how best to set this up would be most grateful.

Hi Tommy23,

In your case, interest only (I/O) account will serve you best. LOC product usually don't have offset attached to it. Mean while with I/O account can have offset.

Another solutions that I can think of is :
(20% DP + solicitor + stamp duty) you can use the LOC to serve this.
For rest 80% loan you can contact other bank to get interest loan with offset.
Then you can put your money to offset link to the 80% of the loan.

Thanks,

 

[Neptune]

Thanks for the quick replies. The LOC that I took out is interest only and I intend to use this for the 20% + buying costs. I have already secured the 80% with another lender and locked it in for 3 years as I got a good rate of 4.59% so no offset facility attached to that.
Is it worth looking at the split loan facilities on the LOC account as I plan on purchasing more IPs in coming years and plan on using the same setup, ie drawing 20% + buying costs from the LOC. Would it make sense to use a split loan for each property?

 

[Rolf Latham]

Is it worth looking at the split loan facilities on the LOC account as I plan on purchasing more IPs in coming years and plan on using the same setup, ie drawing 20% + buying costs from the LOC. Would it make sense to use a split loan for each property?

I think its worth splitting mainly for the offset need

As to for each property is up to the borrower.

For some it makes book keeping easier - for some they prefer a single facilty for all their deposits and they run an excel.

ta
rolf

 

[Terry_w]

Hello Folks,

I was hoping someone could give me some advise with a line of credit loan that I recently got setup using the equity in my home. I own my home outright and got a LOC loan approved for 80% of the value of my property.
We are staring our IP journey and settle on an IP at the end of January. I am planning on using the LOC to pay 20% plus buying costs (avoiding LMI) and have secured a separate loan with another lender for the other 80%.

As we own our home outright and therefore have no other mortgage against it and have surplus cash in savings (more than the amount of 20% plus borrowing costs) then I wasn't planning on using our savings and instead drawing down from the LOC.
However I was going to park our savings in an offset account linked to the LOC (until we need it in a few years) and thereby effectively not pay any interest on what we initially draw down from the LOC account.

I asked our mortgage broker to find us a LOC loan with an offset facility. He picked the ANZ Breakfree home equity loan for us and arranged all the paperwork. He assured us it had an offset facility and told me to arrange for a transaction account to be setup and link it to the LOC.
However, when I went to the branch to setup the transaction account they said the LOC didn't allow an offset account to be linked to it. They also confirmed this to me on the phone too.

So my predicament now (as we settle at end of Jan) is that I don't want to use our own cash for the 20% plus costs but if I draw down from the LOC then I will be paying interest on the amount for 20% plus buying costs which doesn't make sense if we already have this amount of cash earning low interest in another bank account. How can I offset it so I don't pay any interest?

I believe the LOC is both a transaction and loan account in one facility so if I just put this cash into the loan account and withdraw it for personal use in a few years then I will be mixing investment and personal use in the one account which I was hoping to avoid.
I did notice that the ANZ breakfree pacakge has a split loan facility but not sure how to effectively use that for this situation.

Any advice on how best to set this up would be most grateful.

This sounds like you know what you are doing, but your broker doesn't, so you are lucky he didn't stuff things up.

No offset on a LOC, but that doesn't matter because you will be borrowing 80% of the new property anyway. Set this up as a IO loan with a 100% offset and park your funds there. Never pay any of the LOC down (until maybe you have made your offset full of cash, and even then better not).

Once your LOC is drawn you can convert this into a IO loan with its own offset. As the properties grow in value you can increase the existing loans and pay back the LOC money again too.

 

[Terry_w]

Thanks for the quick replies. The LOC that I took out is interest only and I intend to use this for the 20% + buying costs. I have already secured the 80% with another lender and locked it in for 3 years as I got a good rate of 4.59% so no offset facility attached to that.
Is it worth looking at the split loan facilities on the LOC account as I plan on purchasing more IPs in coming years and plan on using the same setup, ie drawing 20% + buying costs from the LOC. Would it make sense to use a split loan for each property?

I would suggest you drawn down the LOC to pay for the 20% plus costs etc. Then split this loan into 2. One a LOC and one a IO loan with offset.

eg. $100,000 house, $80,000 LOC. You use $20,000 for the deposit on the IP so rearrange things to this:
$60,000 LOC
$20,000 IO loan with offset.

Also consider whether it may be better to store your cash elsewhere other than the offset. Eg. if your spouse is not working, you are on the top rate of tax, and the property in your name, then it may be worth gifting your cash to your spouse and getting her to open an high interest savings account to park it there.

Don't forget to borrow to pay expenses too.

 

[Neptune]

Thanks Terry. That makes sense and I will look into that option. As we are both working and both in the same tax brackets then we will look at parking our savings against the 20% offset thereby not paying any interest on this amount until we want to reuse it later.