Line of Credit

[bicko]

Wifey and I are considering changing our 2 investment loans over to a LOC.

What we propose to do is attack the principle of the first one and pay interest only on the second property.
Basically we are looking to accelerate our equity as the property market slows so that we can keep adding to our folio.

Does anyone advise against LOC's for investment or conversly does any one sing they're praises as a finance strategy.
Our current method of savings account to mortgage seems to waste a lot of money power.

Ps. Has anyone heard of Zenith Corp. I had a guy come around last week, selling line of credit at premium prices, offering to implement a thorough budget and advise on Investment property puchases. Yep you guessed it they construct residential properties.

All this for $2750 + 275 + $385 (software) + a big chunk on top of what would be considered normal loan change over costs.

Needless to say I am very sceptical, couldnt i get the same budgeting advice from an accountant for a fraction of the cost.

 

[voodoo]

Hi Bicko,

The wife and I have a set up similar to what you are looking for, I think.
We have a St George Port Folio loan (LOC) for our PPOR and this is used to services our IO IP as well.

All IP rent goes into our Port folio account. This is the only account we have and we take out sub accounts for the IP's.

It wont cost as much as Zenith Corp to set up, thats a a big fee.

check the link to st george port folio.

http://www.stgeorge.com.au/loans/home/range/portfolio.asp?orc=personal

I Know there is better options out there but I am very happy with this set up,

cheers

 

[BV]

Bicko

The STGeorge portfolio is quite flexible and its
interest only. Every subaccount attracts a $12 monthly fee

Westpac has a similar product but that has a $300/year fee

There are other banks around and even your own bank probably has 1
There are also offset accounts that function in a similar way to a line of credit
but you have to be careful as some are not 100% ofset.

Find out if your lender offers a LOC
Think long term. Refinancing costs money, I would also talk to one of our
brokers for advise.

If you wanted to share more info you could also get some advise
from other forum members.

 

[Dos]

Hi all,

I have a couple of faults in my IP knowledge bank and LOC is one of the biggest!!! Without doing a search and as a brief overview, what is it and what is it going to do for me??

Dos

 

[bicko]

Thankyou muchly for the replies,
its good to see some positive feedback on LOC's

Did anyone read the article in API second last issue from that manager of Pro Solution on LOC's, he stated that he thought that you would only save 5% interest over a normal Variable Investment Loan.

Have been scouting Your mortgage magazine, it is giving me some good leads.
Am seriously considering changing lenders as they have been seriously conservative on past valuations. After all why should I loose out on life giving equity.

 

[Rolf Latham]

Hi All

Inflation is a wonderful thing.

What really works to reduce the debt is that the debt is relatively constant, and that your income increases by quite alot over 10 years. I would agree with the 5 % figure.

I would suggest that an Offset product can achieve the same thing and usually at a little lower rate than the same lenders LOC.

STG has a variable rate offset product with a rate as low as 6.37 and 15 years interest only IF the LVR is 80 % or less and the loan is 750 k or less.

Ta
rolf

 

[sbe]

Little bit of quick advice - avoid cross collaterisation if you can.

It makes things so much more flexible.

LOC's (and full offset) accounts are great. They certainly help smooth out the bumps in life, providing you dont use 100% of available funds

You can set this up yourself, unless you feel you need someone to do it all for you, and your budgeting too (for a fee of course).

The amount LOC's save depends on how you use them. Some will save heaps, some will be worse off - such easy access to funds means you need to be more disciplined - not common these days....

Most of the mortgage brokers around here could set you up with a good product(s).

If your PPOR is being used for the LOC, get a LOC with sub-accounts so you can prove separation of funds for the ATO if required. If they're only IP secured, simple LOC / Offset will be fine.

Best of luck.

Simon.

 

[BV]

Dos

LOC's are very useful tools

They are basically loans that function like a credit card.
You have an amount of lets say 500K

You needed 400K to buy a house so you are left with 100K to use for something else. If you don't take the money out your don't pay interest.
There are no redraw fees.

Your sallary can go into the same account and reduce the borrowings
every week as you are getting paid. as soon as lets say $1000
goes into your account you will be paying interest for 399K

You can link the LOC to a VISA/MASTERCARD etc credit card so you can do
your shopping on the credit card money (is set to autopay monthly) and you
can leave your sallary in the LOC so you are saving (i.e earning tax free) 7%
interest on it until the credit card is paid at the end of the month.

They are affective if you have a lot of money comming in from 2 wages, your
business etc. If you have left money in the LOC
They can also function as income protection for that rainy day....

Check the portfolio loan from STGEORGE, other banks have similar products
under different names
http://www.stgeorge.com.au/loans/home/range/portfolio.asp?orc=personal

cheers

 

[Dos]

BV and crew,

Thanks heaps for that info. My current structure is off-set accounts but this way you obviously don't have access to the extra cash that you can borrow. I will look into it for the next one!!

Thanks again,

Dos

 

[Aceyducey]

You can link the LOC to a VISA/MASTERCARD etc credit card so you can do your shopping on the credit card money (is set to autopay monthly) and you can leave your sallary in the LOC so you are saving (i.e earning tax free) 7%
interest on it until the credit card is paid at the end of the month.

I would personally NEVER recommend linking a credit card to a line of credit!

It is too easy to spend more than your salary each month & eat into your LOC.

Discipline is important, but prevention is more effective

Be very careful to keep your personal & investment debt separate. If you have an LOC for investment purposes, avoid muddying it with your personal money & debts. It will save you time & money at tax time & makes a tax audit simpler.

Cheers,

Aceyducey

 

[Rolf Latham]

Hiya

For most people this board an Offset Product is likely to be better for the primary personal debt. Most people here will upgrade from their PPOR and turn the PPOR into an IP, so we dot want to pay the debt down, but still want to save interest with cash parked against debt, an offset can help you do that and isolate your tax paid money.

Ta

rolf

 

[wbthom]

Another factor to consider in the choice is servicibility and effect on LVR. Line of credits are treated like large credit cards. Even if the LOC is not fully drawn, servicibility and LVR's are calculated on the limit not the curent amount owing.

Bill

 

[Rolf Schaefer]

A LOC is good for people who are financially very disciplined. Also, when banks assess your serviceability, they always assume that the LOC is fully drawn down. The other important thing to remember about LOC is that when you have an LOC against your PPOR and you want to convert PPOR to IP then you may loose some tax advantages, in this case you are better off using an Offset facility.

 

[BV]

The other important thing to remember about LOC is that when you have an LOC against your PPOR and you want to convert PPOR to IP then you may loose some tax advantages, in this case you are better off using an Offset facility.

Hi Rolf

What tax advantages are you refering to?
Are you thinking of pulling out unused funds from the original LOC?
(the 100K that were left over from the above example)?

I believe that any unused funds from the original LOC can be taken out and
used for any purpose we want but we can only claim the interest if the funds
are used for investment purposes.

But I should be able to pull out all the money that are mine.
i.e my savings, the money I left in the account since settlement date
and use them for my new PPOR without upsetting the ATO.

i.e if in the 10 years that I kept the house for I managed to reduce the 300K
down to 130K, then when I convert the PPOR to an IP, I should be able to
take my money out (170K) and use them to buy my next PPOR.

The LOC would stay the same but the borowings will then be back
to day one level (300K) and thats the important part,
we are making the house fully mortgaged again.

cheers

 

[Rolf Latham]

Hi BV

Please seek professional tax advice, this is how I see it.

If you have an investment loan and reduce that loan with your tax paid cash, and thence redraw that cash for a non deductible purpose, the amount redrawn is not deductible.

If you have a PPOR loan and reduce the debt from 400 to 100 with YOUR money, 5 years later you want a new PPOR but plan to convert the old one to an IP. All YOUR money is parked in the loan BUT you need 300 k for deposit and costs. So you draw on your IP loan. Bad news though, the 300 k is NOT deductible, the purpose of the redraw is Personal, your money or not, since you have previously reduced the debt.

So now your in a position where your new PPOR debt is huge and the IP debt is low, and indeed you are paying income tax on the rental rtn from the IP.

You would be soooooo surprised how many acctants and bankies advise their clients to pay OFF their PPOR/IP loan. DUMB DUMB and DUMBER advice unless the client KNOWS 110 % that they will NEVER turn the PPOR into an IP. Tens of thousands and in some cases 100s of thousands of dollars lost in deductions - and it could have been avoided to a large extent.

Use a 100 % offset acct, then the 300 advance payments in the above model are in YOUR acct, so when you use the money your previous PPOR now new IP debt is still 400. Work the number on a taxable income of 80 k and see what you get over 10 years - scary :O)

I know Im not the first person to have worked with this model, but im blown away STILL as to how many young home buyers on good incomes are drawn into "low rate" loans where there are no SEPARATE offset facilities. Biggest offenders, I wont name names, but look for the cheapest end of the variable loan non bank market and you will know. The they have have the hide to claim "100 % mortgage offset" and its not till you look at the detail and realise its a redraw loan and the offset is internal.

I have so far resisted the rant and rave on other posts why brokers dont use certain lenders. You should always ask yourself, what doesnt this product have, as well as what does it have.

Finally, in many instances a LOC or term loan is ok, BUT you need to be very sure of your future circumstances. All Im suggesting is that where its possible, that you future proof your position, and often it may even cost you less.
ta

rolf

Ta
rolf

 

[Rolf Schaefer]

BV,
like Rolf L is saying: "Begin with the end in mind".

If you are seriously contemplating to convert your PPOR to an IP, then it is not advisable to attach an LOC to this property. Most of my clients in the same position do attach a 100% offset which can (as they say) be fully drawn down and leaves your PPOR (new IP) at the original (high) loan level, hence preserving your tax benefits.

You may want to discuss this with your accountant/financial adviser.

PLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice. I am not a qualified Financial Planner hence I am not authorised to give advise on Offset accounts.

 

[BV]

Hi BV

Please seek professional tax advice, this is how I see it.

If you have an investment loan and reduce that loan with your tax paid cash, and thence redraw that cash for a non deductible purpose, the amount redrawn is not deductible.

ta

rolf

Ta
rolf

Hi Rolf,
I was only refering to a LOC (portfolio loan)which is like an offset account.

My money left in the LOC are not money that have been repayed
they are simply left there to offset the loan and as such can be taken out
any time you want bringing the loan to its initial level.

Do you see a problem with that?

cheers

 

[Cosmo]

Hi BV,

The interest on that 170k you intend to pull out of your LOC will NOT be tax deductable in the scenerio you presented........

Cosmo

 

[Rolf Latham]

Hi BV

Yes there could be an issue in my non professional view.

With a LOC, to save on interest you MUST reduce the loan balance. A principal reduction has therefore taken place. Any redrawing of that principal reduction for purposes that are not investment/business would be regarded as personal and therefore not deductible.

Unfortunately "like an offset" doesnt cut it, while it has the same effect on saing interest, its the principal reduction bit that may cause an issue at audit time.

Specifically, portfolio is a redraw based product for the purpose of this discussion, its not an offset product. In the STG stable this is called Mortgage Equaliser and can be linked to the standard variable home loan .

Ta
rolf

 

[BV]

Guys,

I agree that an offset account is a better way to go
if someone wants to redraw funds later.

I can understand your concerns on pulling own funds out of a LOC.
But thats not how I see it in this case because the STGeorge
portfolio LOC is an interest only product for the life of the loan.

With this particular LOC there is no P+I component as in some other
LOC products from other banks so the loan is not reducing.

The monthly statement shows the full loan size and available funds
it does not show that the loan size has been reduced in any way.

If the ATO wanted to challenge someone with a STG portfolio LOC,
I believe they would NOT have a very good case.

The question though is... Do they need a good case to challenge someone?
They don't. So its better to have a clear cut case in any dealings with the
ATO especially as their rules vary depending on who you talk.

I agree, time to get professional advise on this one.

Thank you all for your input.