LOC to finance investments & maintenance of IP's

Hi,

I am considering refinancing an existing IP (IP1) into a LOC loan to use the available equity to finance maintenance/repairs and future IP purchases.

The reasons I am investigating this structure are :-
1. To use the banks money rather than my own money to finance IP/Investment related costs.
2. It will also serve to keep my Investment finances in one working account. Rent from all IP's could be paid into this account & Interest from all IP's could be debited from this account
3. To have funds readily available to pay for 'emergency repairs' such as water heaters etc...
4. It is a good time to revalue the IP while the market is high.

I intend to put all of my pay into a 100% offset account linked with IP2 (when the PPOR is paid off). This offset account will serve as my 'personal working account' and help reduce the interest payable on IP2.

I am aware that I can claim all of the interest on the LOC loan if it is used for 'investment related purposes' but would it cause complications with my Tax return ?.

Does anybody arrange their finances like this or similar to this ?.

Are the high fees & charges associated with LOC's to much to pay for the flexibility/available cash for repairs/maintenance ?

Are there any gaping holes with this financing arrangement ?

Any comments would be greatly appreciated.
 
Hi Will

Many investors in your position use a structure like the one you propose.

Certainly I dont believe the tax office would have an issue with you reducing your tax deductions by paying less interest. In terms of the documentation the offset acct does it automatically anyway.

Note you do generally NOT need to use a LOC to pull equity. Many lenders dont really care if you use an interest only term loan to do this.

If you are going down this track there are a couple of minor traps for new players. Dont EVER take anything for granted in terms of loan features etc. A primary example is ANZ's Investment Loan. If it is set up as P&I then you can tip unused funds back into the account and redraw them. If it is set up as I/O then advance repays (or parked money) is locked up until the IO term expires and 10 years is a long time for such a basic boo boo.

The reasons many agressive investors prefer term loans to LOCs when doing an equity pull:

1. Loan amount > 300 000 on an LOC basis are hard to get at LVRs of 90 %

2. Most lenders LOC will not go beyond 80 %, CBA, ANZ are a good example, some go to 85, like Heritage and Westpac, and few will go to 90 %, Homeside, Bankwest, et al.

3. LOCs generally have annual to three yearly reviews, many aggressive borrowers dont want to have to front up for roll call in 3 years. Seeing that 10 yr I/O terms on IP loans are becoming more common, they are a lower risk from that point of view. There are some exceptions to thsi like Origin have an Evergreen LOC where you wont get hassled.

4. Refinance with term loans can go as high as 95 %, in some instances even with Mortgage Insurance premium thrown in on top (capitalised).

After that novel, many do actually prefer the simplicity and ease of the LOC type loan and if you look around the rates on lends > 150 or > 250 are no different to the discounted offset products.

In closing, many readers would know that I dont like LOCs because they offer less flexibility in tax management. An I/O term loan is better for future proofing your tax entitlements where used against a PPOR.

Ta
 
Hi KM

Its the old pay off your home loan then turning it into an IP trick.

Pay down your LOC, then you want to buy new PPOR and retain the old PPOR as an IP. Redraw the repayments out of the LOC for the deposit for the new PPOR. Redrawn portion of loan is NOT tax deductible- used for private purpose.

Instead.

Park cash in offset acct linked to PPOR loan. Same effect of paying less interest etc. BUT when you then remove the cash from the offset acct to buy your new PPOR, you have most of the old loan intact. Soooooo when the old PPOR now becomes IP you have some gearing remaining.

ta
 
Hi Rolf,

Yeh, I love the advantage of offset accounts linked to an IO loan as you described above. Just wondering, is that still appropriate or recommended for WillG's case if he is referring to the refinancing of an IP? Or do you think it would be good for him to refinance his PPOR into an IO loan with offset account?

Cheers

John
 
Hiya

I would still suggest a Term loan over an LOC in most but not all cases.

Even in this instance parking money in a LOC and paying down an IP loan at this time may not present an issue. Who knows what the future will bring though. Maybe we want the advance payments to be used for a non tax deductible purpose.

Analogy -
Serious property investors that are self employed protect their assets. They dont anticipate the someone will try to clean them out, BUT why take an unnecessary risk ?

ta
 
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