We are about to invest in IP number 1. Looking at a interest only loan with offset, however just as the broker was leaving he mentioned Line of credit and it has me wondering. Are there greater advantages with a LOC than an IO loan? We don't want to cross collateralise at all.
Loan v line of credit
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A term loan w/ a linked offset is most likely going to be cheaper than the LOC and its more reliable in that there is not repayable clause.
I would with the term loan unless there is a specific reason to use the LOC.
I would with the term loan unless there is a specific reason to use the LOC.
A line of credit is simply another type of loan with certain features. Please don't be tricked into thinking it's just a big lump sum of money.
The main features are that it's fully transactional (like a transaction account) and it is usually interest only for the full term of the loan. The biggest downsides are that you can't have an offset account, it's more expensive and the bank can request for it to be repaid at will.
In most cases a regular interest only variable loan will do the same job and will save significant amounts over the life of the loan.
The main features are that it's fully transactional (like a transaction account) and it is usually interest only for the full term of the loan. The biggest downsides are that you can't have an offset account, it's more expensive and the bank can request for it to be repaid at will.
In most cases a regular interest only variable loan will do the same job and will save significant amounts over the life of the loan.
So in which situations would a LOC be more beneficial then?
You should never use a LOC for a main loan because:
1. rate generally higher
2. often can be called in early by lender
3. can be a tax nightmare if salary etc is deposited
You should use a LOC only for accessing equity because:
1. Good for tax reasons
2. allows you to take money from the loan to pay expenses
1. rate generally higher
2. often can be called in early by lender
3. can be a tax nightmare if salary etc is deposited
You should use a LOC only for accessing equity because:
1. Good for tax reasons
2. allows you to take money from the loan to pay expenses
Yes we are trying to access equity from PPOR. Thank you for your answers I think we will go with the IO loan.
3rd option....IO loan where the lender allows the settlement proceeds / funds of the new loan to sit in the loan account until needed and which can be redrawn to pay the investment deposit and costs.
This is the best of both worlds:
1) You don't have to park the settlement proceeds / funds in an offset and potentially lose the link between borrowed funds and the investment purpose. "Nexus" . This is especially true if you plan to take a while to find the IP but want to get set up ready to go now.
2) There is no line of credit loading of the rate.
3) No at call clause.
This is the best of both worlds:
1) You don't have to park the settlement proceeds / funds in an offset and potentially lose the link between borrowed funds and the investment purpose. "Nexus" . This is especially true if you plan to take a while to find the IP but want to get set up ready to go now.
2) There is no line of credit loading of the rate.
3) No at call clause.
This is the best way I think
Marty,
IO loan where lender allows on settlement money to be sitting in loan account
(i.e. redraw). Isn't paying the money back into redraw is paying off the loan..
I thought money accessed via redraw is new beginning.....
Also, regardless you pay off the loan on settlement, only some lenders allows EFT or bank cheque from redraw account....If you lender doesn't allow this (e.g ANZ) you will have to park money somewhere to do EFT or bank cheque. In this case what would you do?
thanks
Yes, paying money into redraw is paying off your loan.
Some lenders will allow funds to be drawn out of redraw directly. If they don't, you need to move the funds into another account and draw it from that account. This can possibly cause deductability problems and where a LOC might be a more appropriate choice.
Marty's plan is a good one, if the lender will allow it.
Thanks Pete. I am bit curious about Marty's comment here that by parking settlement funds in offset account (Brand new) potentially loses the link between borrowed funds and the investment purpose. "Nexus". Is there any specific ATO guideline on how long this arrangement can be in place without breaking nexus....I find lot of confusion in this area...frankly if your lender doesn't allow to send money from redraw then you would have to park somewhere then would you consider that as breaking nexus....
No there is not as far as I am aware. If you want certaintly use a LOC or apply for a private ruling.
