Offset as security to borrow

[Spectre]

Hi

I came across someone who threw this question at me (I realise it might not be right 'structurally' but thats not where I'm aiming on it).

Say you have a house and a loan against it.
house value is $250k and you owe 80% or $200k.

So, if you borrow any more money you enter the world of the mortgage insurer yada yada yada...

Now, as a variant, say you win $200k in lotto or wherever, and dont really know what to do with it so you stick it in an offset account so you are paying no interest on the loan (although I believe you still have principal repayments).

Can you then go to the bank and say you can hold onto these funds in the offset, I now want another $200k loaned against the money in the offset as security to go buy some shares?

So on one hand you are paying no interest and on the other hand keeping your cash liquid so you can invest further and at the same time be able to turn the property into an investment if you wanted to in the future (if it isnt already)?

Ideally if you have $200k in cash and $250k in property totalling $450k could you then borrow 80% against it?

Hopefully that makes sense, I'm entirely too sober.

Thanks
L

 

[The Y-man]

No - at least from the way I have understood it.

The most orthodox way would be to redraw the $200k when you decide to invest (thus incurring interest - HOWEVER, the interest may become tax deductible at this point as it is borrowed for investments)

In the case of shares, you then use the $200k as "cash collateral" (fancy of way of saying "security") to buy shares - in theory could max out and borrow $266k on a 75% LVR (not recommended for beginners!!) - so you could have a $466k share portfolio.

Cheers,

The Y-man

 

[asdf]

It certainly would be an interesting product to design! In short, theres no product out there like this at the moment within margin lenders but I'm sure they are working on it. Wealth creation is an area which the banks and finance companies know where the money is over the next 10 years hence many are plowing resources into building systems, teams, structured products..etc..

From what I understand, you don't want to draw down any more cos ur on 80% already. Unfortunately I don't know of any margin lending account that allows you to use it as an offset facility also. I'll need to think about how such a product would work.... your excess cash is used in a ML account to offset other interest obligations. Interesting product - normally you'd want to keep your ML balance high so keep spare cash to a minimum but at the same time, you want an offset to be as high as possible to reduce interest on PPOR. Hmmm, not sure how much appetitie in such a product. With a $200K cash balance in ML, you can borrow 666K at 70% thereby giving you 866K shares/managed fund exposure. All very interesting though...

 

[Able]

lukntel,
You would not have $250k in property and $200k in cash totalling $450k. The offset account reduces the interest acruing on your loan however the loan is still there, so you only have the orginal $50k equity in your property.

Also, IMHO, i believe the margin lender would need to take control of your cash funds if you are putting them up as security to borrow against. Therefore your funds cannot be liquid. However such a product could still be feasible.

Regards
Alistair

 

[Spectre]

I was thinking you could use the offset as security to borrow higher against, i.e. set up a line of credit on or something and then use that to invest...

Say as an example, if I didnt put the money into an offset but put the money into a term deposit with the bank.

The bank would be able to take security over the term deposit wouldnt they - I figure they would as they did when I sold a place and had a settlement a few weeks later with a cash account and i transferred the loan from one property to another.

ust toying with the thought that if it was in an offset rather than a term deposit it might just be a bit more effective.

thx
L

 

[crest133]

LOC has the flexibility, there's no LVR against cash assets, cash is 100%.
crest133

 

[Rolf Latham]

Cash security tends to be restricted to term deposits, and not all lenders have a banking licence, abd funnily enough some lenders only allow a 95% security equivalent for cash .

often use parked cash to provide temp security when doing property swaps - another important thing to keep in mind when selecting lenders

ta
rolf

 

[Spectre]

Time to hit up the guy at the bank....

 

[redwing]

Did you win $200k in Lotto Luke

REDWING

 

[Spectre]

Cant say that I did.
I would really like to though.
I think the most I've won on lotto was the last time... that was only 1.43m