Query on LOC usage

Hi everyone

Just a quick query regarding your thoughts on the best way to use a LOC in my scenario.

OK, we have a fully paid off PPOR and will shortly be buying IP #1. We have no debt at present.

IP #1 will be financed with 20% deposit + costs in cash; the rest being borrowed via a LOC.

In the future, the plan is to add more IPs or shares by increasing the limit on the LOC and adding sub accounts.

In summary, we will just have a LOC and a 'normal' everyday transaction bank account. I understand that interest will be charged to the LOC each month, and we will transfer money to that account to cover the cost, if needed.

My questions are regarding income and expenses, in terms of making management and accounting simpler.

- where should normal (salary) income go? (LOC IP #1 account or transaction account)
- where should rent income go?
- which account should be used to pay rates, repairs etc?
- is it best to build up more savings in the transaction account (or term deposits, or whatever), or reduce the LOC interest by having spare cash in there? (understanding, of course, that any extra payments in the LOC cannot be drawn out for personal expenses)


I don't thinkt that this is the best way to set up your finances. And you are in a good position atm to set them up anyway you want, personally I would be looking to do it differently to how you are suggesting.

But to answer your q's:
- You should definitely NOT put your salary income onto the LOC - if you withdraw any money off your LOC that is not specifically for investment use, you will be contaimnating your tax deductability of that loan.
- As above with rental income.
- Up to you which account to pay rates, repairs etc from.
- Personal decision. If you have no bad debt, then there is no reason why you shouldn't pay off your good debt (and plenty of reasons why you should).

Seriously reconsider setting things up like this. Plenty of people here could offer you other alternatives. As for me, I think you would be better off taking out another mortgage (this can still be done against your PPOR if you wish) with a 100% offset account attached to it and dumping all your access funds in there.
I'm going through the same process now; my structure is as follows:

PPOR value $650k - no debt

Savings $100k

IP1 (just exchanged) $390k

LOC $100k Secured against PPOR (used for 20% deposit and cost)

Loan for $312k (80%), with offset account/facility

Place $100k (savings) into offset account

All income goes into the offset account and outgoings come out of the offset account.

$100k is my buffer which I will always have access to if needed.
rugrat, Collector - thanks for your great responses.

So, it seems like the method I was proposing is maybe not the best idea.

The thinking behind it was that, given that we have 20% + costs deposit for IP1, why give the bank security over our PPOR too?

Would it be significantly better to use the PPOR as security, even though the overall loan would be bigger then?
What are the benefits here? Is this a better alternative?

Collector, can I just check, are you saying that you have a LOC with two subaccounts for PPOR and IP, or do you have two loans - one LOC and one other?

Hiya DC

The lower risk version is

1. Get the maximum reasoable loc or combo equity loan with offset secured against the PPOR. park spare cash in the offset

2. If you are very concerned with lender risk, get IP with an 80 % lend secured only to the new IP, with a diff lender. If lender risk isnt a proble, use the same lender as for the PPOR loc/equity loa, but avoid Cross collateral if you can.

Sounds like you are looking at St George ?

Collector, can I just check, are you saying that you have a LOC with two subaccounts for PPOR and IP, or do you have two loans - one LOC and one other?

I have a LOC secured against my PPOR - this was for $100k (can extend later if needed) this is with CBA. - This is to cover 20% + cost.

2nd loan for the balance (80% -I/O - avoid mortgage insurance), this loan has an offset facility, this loan is with bankwest.

Place savings + rental income + salary into the offset account attached to the 2nd loan - this will offset the loan reducing the amount of interest payble each month.

Try to keep the loans with separate banks/lenders to avoid Cross collateral - as Rolf suggested.

So in essence I am borrowing 100% + Costs, placing my savings into the offset account in order to reduce the interest repayments while maintaining the flexibility of having access to my savings at anytime if needed.

Just an update on this one.
We visited a mortgage broker today and I understand that LOC is not the best loan to use in our situation.

We are looking at just a standard variable loan with 100% offset secured against PPOR and IP1, borrowing 100% + costs of IP1.

This seems to be a sensible, easy to understand option.

Again, thanks for the help!

Smells like you will be cross collateralised.

Easy for the broker for sure, but right for you ??? Possibly not, actually very verly likely not.

Id suggest you seek a second opinion on the structure

Nah, I think no LMI, coz crossed the LVR prob 50 % or so, hence why the lenders educate some brokers to get "maximum contribution" in the guise of convenience or simplicity.

The concept of max security for your risk isnt new, and in general lenders will "try it on" whenever possible.

Rolf, you are right. There would be no LMI because the LVR would be only around 50%.

Whilst I understand that we could do LOC against PPOR to borrow the deposit and then get an IP loan from another lender to avoid cross collateralising, I did verify that in the future it would be easily possible to release security over the PPOR when either the equity gained in IP1 is sufficient, or when we decide to throw cash into the IP1 loan.

We are lucky enough to have plenty of spare cash at the moment, so intend to leave that in the offset for now - but we could pay down 20% on IP1 whenever we choose and then release the PPOR.

Now, I also understand that cross-collateralising can get very messy with lots of properties. So, when we get around to purchasing IP2, perhaps that would be a good time to release PPOR to just leave us with one investment loan with 2 IPs, secured against the IPs (or 2 loans, each with 1 IP as security). I think we can get to this stage quite easily over the next year or two.

Of course, should we decide to go further after that, using different lenders will have to be a big consideration so we do not have all our risk with one lender. But that's a long time in the future.

Do you guys have any serious concerns with this?

Assurances and verifications are always good.

legally, and in reality, you can usually only rely on the here and now, remember that with ANY lender........................you are only as good as your last repayment. I dont care what people think of their bank or CU or BS, the loyalty will only extend as far as they want it to, beyond that, "persona non grata" is common.

In your case, there is no defined benefit in the xcoll, except u have one loan statement. Im firmly against Xcoll unless the borrower derives a defined commercial ( or even a defined "soft") benefit. There may be a benefit there, but I dont see it.

What you are doing is a common strating point, and in most circumstances does NOT end in tears, but in some circumstances does.

Why take a risk ( however small) for no benefit to you ?

Please note, Im not saying that your 2 loans need to be with 2 diff lenders, thats overkill perhaps..

Rolf, Rugrat, Collector,

If your first IP has a loan with an offset receiving your wage etc and your PPOR has a LOC, what happens when you add more IPs?
You get rich :)

Seriously, how do you mean what happens ?

I assume you mean the next IP

As time progresses hopefully your PPOR is now worth a bit more, and the new IP is worth a bit more.

So you top up the LOC on the PPOR, and create a new one on IP 2 and away you go again.

Assuming of course you are correctly structured and that serviceability isnt in the way, you arent on the nose of the lender

IP 2 would therefore not have an offset as the wage is already going into IP 1 offset. Woudl IP2 have its own IO loan preferrably with a different bank?

To finance 2nd IP:

If you have enough equity in your PPOR you can extent your LOC, or get a 2nd LOC to cover deposit & cost and the borrow 80% from new lendor.

Your second IP loan can have a offset account - this is up to you - I would have one and have some $$ sitting in it - just in case you want an offset account attached to it down the track - who knows, you may sell IP1 and keep IP2 - gives you more flexibility
This is how I would do it.

-Set up a LOC for the max possible on the existing place.
-Use the 20% deposit from this.
-Don't use any of your own cash.
-borrow the remaining 80%, IO with a 100% offset account.
-All salary and rents should go in the offset account.
-LOC interest should be paid from the offset, or capitalised (dep on your incomes)
-The loan remayments should come from the offset
-And, use a interest free credit card with rewards points for all purchases leaving your cash in the offset longer. Saves you interest and gets you rewards

But i would also suggest you look at using a discretionary trust. The borrowings would work out similar to the above, but you would lend the trust the 20% deposit to start off - or maybe gift it, depending on your situation.
Terry, it sounds like you are endorsing what others have sugggested. We don't have any debt on our PPOR and we have spare cash. Do you still say don't use any of our own money?
Hi B

Yep, by putting the cash in the offset you will end up paying the same interest overall with a couple of advantages as well. I can think of 2.

1. It is getting harder to borrow all the time. So borrow as much as you can before the lending rules tighten up more. Your circumstances may also change too - eg losing job.

2. Keep your cash in case you need it for personal expenses. If you used it all up and then had to borrow to buy or get some money for something personal then you won't be able to claim the interest.