LOC, offset account or variable loan account with redraw facility

[Terry_w]

Hi Terry,

Is the money parked in LOC earn interest? I'm thinking parking an extra equity from an IP into a LOC for some months, until the next IP.

Thanks.

Hi Jolly

Any money you deposit into a LOC will save interest. But there are many tax consequences to putting money into a LOC so you shouldn't do it without taking tax advice.

Usually it would be better to park any cash in an offset account against the home loan - but this will depend on your situation.

 

[Brady]

Hi Terry,

Is the money parked in LOC earn interest? I'm thinking parking an extra equity from an IP into a LOC for some months, until the next IP.

Thanks.

Can you define what you mean by equity?

Are you talking about proceeds from a sale?

Or are you talking about borrowed funds / equity loan?

Either way I wouldn't be putting funds into LOC, I would suggest a offset account would work better in most cases. Be cautious of mixing funds either way you go (borrow funds for investing and personal funds / savings)

 

[Jolly123]

Hi Brady,

I have a LOC against the equity of my PPOR which is meant for buying an IP2. I have IP1 which is under a diff lender which will release an equity of $80k (ubank). Since it is not easy to deal with ubank, I want to take this equity out and put it somewhere else that is more easy to access. It will be purely for investment which will not be mixed with personal. My offset is currently against my PPOR, so I could not place it here. ATM, I'm still trying to get an advice on where is the best place to park this $80k equity.

Thks.

 

[Terry_w]

Hi Brady,

I have a LOC against the equity of my PPOR which is meant for buying an IP2. I have IP1 which is under a diff lender which will release an equity of $80k (ubank). Since it is not easy to deal with ubank, I want to take this equity out and put it somewhere else that is more easy to access. It will be purely for investment which will not be mixed with personal. My offset is currently against my PPOR, so I could not place it here. ATM, I'm still trying to get an advice on where is the best place to park this $80k equity.

Thks.

I see. Risky to use these products in my opinion as any savings in rate can be washed away by being unable to claim interest.

Basically what you want to do is to refinance $80,000 of the LOC with $80,000 borrowed from ubank?

Does the ubank have redraw? Maybe better to park in there.

Please seek your own tax advice on this as risky.

 

[ximentuxue]

<quote> I will just draw it all out from offset acc later for 20% of my IP deposit. </quote>
ximentuxue
Since you've planned to draw it all out, why don't you leave the new loan as is (you won't pay interest until you draw it down), then use it to buy a bank cheque for the 20% deposit for your IP (assuming the loan has redraw facility).

Thanks for the reply.

Actually, that's what I have decided to go with. I will simply apply for a standalone variable loan and get fully approved first. Then when I have located my IP, I will draw money out to pay for 20% deposit.

 

[Brady]

Thanks for the reply.

Actually, that's what I have decided to go with. I will simply apply for a standalone variable loan and get fully approved first. Then when I have located my IP, I will draw money out to pay for 20% deposit.

I like this option.

This is why I was questioning the equity in the above posts.

I prefer the separate loan. LOC can be easy messed up or as terry said risky.

 

[s0805]

Thanks for the reply.

Actually, that's what I have decided to go with. I will simply apply for a standalone variable loan and get fully approved first. Then when I have located my IP, I will draw money out to pay for 20% deposit.

i don't think you can get your loan fully approved and not draw it down...until you find your property.....from memory your letter of offer would have expiry date saying until
when those offer docs are valid to...I am with ANZ and I was given this answer in black and white....not sure about your lender... check with them first...

if you are talking about pre approval then it's fine...


On the other note,

Here is the PBR that Terry was reffering to about offset, i think....(Good read, highly recommended)

http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm

I understand this is PBR doesn't apply to everyone....nonetheless it gives insight into ATO's mindset about this arrangement.....

there is general understanding that once your borrowed money hits the savings account (e.g offset) before they were used for investment... loses their tax
deductibility. tell you what you will not find this in written somewhere (at lease, i didn't....) Key is that don't mixed the borrowed money with personal end of story.....


If I would be you this is what i would consider

setup SVR IO loan make sure it has free redraw availble (most lenders do)....draw down your loan and put it in redraw....now let's say you found the property in 6 months....once your
offer is accepted....get your lender to create new offset account linked to this loan...it should not take more than a day...transfer money from your redraw to offset..
write cheque from offset account for initial deposit.....and let all money sit in offset until the final settlement is done....after settlement if any excess money left in offset put that
back in redraw....close the offset.....if offset is costing you money with this method it won't costs much....as long as you can trace the money and show the link how
they were used for investment purposes it should be ok.....

Please don't consider this as advise in your scenario....I was in the similar situation last year....in fact my borrowed money were sitting in offset
(not mixed with personal use) for 8 months after settlement.....now they are in redraw...

Again, I am not qualified to give you advise about this....this is where your accountant comes in...run pass all scenarios with them and get their advise
in written about tax deductibility....I've.

 

[ximentuxue]

i don't think you can get your loan fully approved and not draw it down...until you find your property.....from memory your letter of offer would have expiry date saying until
when those offer docs are valid to...I am with ANZ and I was given this answer in black and white....not sure about your lender... check with them first...

if you are talking about pre approval then it's fine...


On the other note,

Here is the PBR that Terry was reffering to about offset, i think....(Good read, highly recommended)

http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm

I understand this is PBR doesn't apply to everyone....nonetheless it gives insight into ATO's mindset about this arrangement.....

there is general understanding that once your borrowed money hits the savings account (e.g offset) before they were used for investment... loses their tax
deductibility. tell you what you will not find this in written somewhere (at lease, i didn't....) Key is that don't mixed the borrowed money with personal end of story.....


If I would be you this is what i would consider

setup SVR IO loan make sure it has free redraw availble (most lenders do)....draw down your loan and put it in redraw....now let's say you found the property in 6 months....once your
offer is accepted....get your lender to create new offset account linked to this loan...it should not take more than a day...transfer money from your redraw to offset..
write cheque from offset account for initial deposit.....and let all money sit in offset until the final settlement is done....after settlement if any excess money left in offset put that
back in redraw....close the offset.....if offset is costing you money with this method it won't costs much....as long as you can trace the money and show the link how
they were used for investment purposes it should be ok.....

Please don't consider this as advise in your scenario....I was in the similar situation last year....in fact my borrowed money were sitting in offset
(not mixed with personal use) for 8 months after settlement.....now they are in redraw...

Again, I am not qualified to give you advise about this....this is where your accountant comes in...run pass all scenarios with them and get their advise
in written about tax deductibility....I've.

Thank you for sharing.

I talked to my accountant today and in her opinion, in my case, SVR IO with redraw facility or SVR IO with offset won't make any difference. She said, the point is the purpose of using the money. As long as the purpose is for investment property and not contaminated with personal use or whatever else, then it should be fine.

 

[speary]

The only problem with this is that when you redraw, that is considered to be a new borrowing, so, if you redraw for private purposes, you will contaminate your loan. This is why offset accounts are preferred as you still get the reduction in interest but the funds are not borrowed and can be used for whatever.

 

[s0805]

Thank you for sharing.

I talked to my accountant today and in her opinion, in my case, SVR IO with redraw facility or SVR IO with offset won't make any difference. She said, the point is the purpose of using the money. As long as the purpose is for investment property and not contaminated with personal use or whatever else, then it should be fine.

Glad to hear that your accountant and mine share the same views. I am sure you have their advise in written...just in case.
I would personally prefer SVR with redraw and let excess money sit in redraw until i need for investment purposes....in my
case additional offset was costing me....bottom line is don't mix the borrowed money with personal use...