What is the average time between joining the forum and buying an IP?

How is this better then, if you have 3 IP's fully paid for with cash, or 3 IP's totally debted, but with all the loans covered by the cash in the offset?

Because if you suddenly need a lot of cash for any reason - health, family, loss of work, wanting to pounce on a fantastic investment opportunity or otherwise - it's a lot easier to just draw the cash out of an existing offset account than it is to go cap in hand to the Bank for a new loan.

Particularly if you want a new loan just when you have just lost your income for whatever reason eg job loss. It's only when you really need the loan that they won't give it to you. So get the loan and offset in place before you need it!

Why wouldn't you want that cash available to you? Get the loans in place while you can but of course only if you have the discipline not to spend the offset money on frivolities, which is clearly not a problem for china.
 
Because if you suddenly need a lot of cash for any reason - health, family, loss of work, wanting to pounce on a fantastic investment opportunity or otherwise - it's a lot easier to just draw the cash out of an existing offset account than it is to go cap in hand to the Bank for a new loan.

Particularly if you want a new loan just when you have just lost your income for whatever reason eg job loss. It's only when you really need the loan that they won't give it to you. So get the loan and offset in place before you need it!

Why wouldn't you want that cash available to you? Get the loans in place while you can but of course only if you have the discipline not to spend the offset money on frivolities, which is clearly not a problem for china.
Thanks for that.

What about the redraw, with an LOC set up against the 3 IP's which doesn't get used if poss?
 
Thanks for that.

What about the redraw, with an LOC set up against the 3 IP's which doesn't get used if poss?

If the original cash was after tax cash, then it's much better to have it in offsets rather than as redraw / LOC. After tax offset cash can be used for private purposes without messing up the deductibility of interest.

Also, as we've seen in other threads, LOCs can be closed at the discretion of the bank.

The bottom line is that everything else being equal, more liquidity is better.

That's assuming one has the discipline not to just spend it foolishly if it was sitting in an offset account.
 
If the original cash was after tax cash, then it's much better to have it in offsets rather than as redraw / LOC. After tax offset cash can be used for private purposes without messing up the deductibility of interest.

Also, as we've seen in other threads, LOCs can be closed at the discretion of the bank.

The bottom line is that everything else being equal, more liquidity is better.

That's assuming one has the discipline not to just spend it foolishly if it was sitting in an offset account.

+1 It's also worth pointing out that in my loan agreements offset accounts can also be tapped by the Bank if they want to - of course it's unlikely unless you give them good reason to do so such as default on repayments etc. See the "all monies clause" for details.

So if you want to be very conservative you put offset funds into another bank / term deposit / investment (eg index fund) but of course there may be tax / IR margin effects and other risks associated with those options.
 
My understanding of Chinas approach

Find property at say $2mil

Use LOC on PPOR for the 20% or even 30% contribution and then costs. So he will need $600k + stamps ($100k) + GST (unless going concern). You will be able to claim the GST back.

Get a loan for the balance - $1.4mil financed through seperate loan (different bank) with an offset facility

Total cost $2.1mil 100% financed with all interest deductible.

Throw the excess cash into the offset account thus preserving the cash separate from the investment.

Instead of LOC on PPOR, is it possible to get an ordinary home loan against the PPOR with full offset? So I would get a 600k loan against PPOR and put it all into the offset and when it comes to buy IP, I would withdraw from offset.

I understand that this option is cheaper than LOC. And if I do not use offset funds for personal reasons then this should not create tax issues? Rent and other income would then go into another account from which I would pay my monthly interest on LOC and the loan on IP.

So I am curious regarding the merits of this arrangment versus LOC against PPOR.
 
Instead of LOC on PPOR, is it possible to get an ordinary home loan against the PPOR with full offset? So I would get a 600k loan against PPOR and put it all into the offset and when it comes to buy IP, I would withdraw from offset..

My only question would be regarding the amounts. The LOC at the start of the thread was $500k. It may bempossible to get $600k but that would depend on your bank's valuation of your poor.
 
Yes it is....which is what I would generally recommend in any case.

+1 with Aaron, in most cases this is what I suggest for clients.

It's very important not to mix the use of the funds in the offset though, no taking funds and replacing for personal use.
 
+1 with Aaron, in most cases this is what I suggest for clients.

It's very important not to mix the use of the funds in the offset though, no taking funds and replacing for personal use.

Why?
The offset is cash so has nothing to do with tax. Why can't you mix business and investment cash together?
Fully agree if you stated this in relation to loc. but I don't see the point for an offset.
Can you please clarify for me.

Thanks
Blacky
 
Why?
The offset is cash so has nothing to do with tax. Why can't you mix business and investment cash together?
Fully agree if you stated this in relation to loc. but I don't see the point for an offset.
Can you please clarify for me.

Thanks
Blacky

The confusion will arise because China is proposing to draw the loan down and then place in the offset.

As such the money now in the offset is not personal money but in actuality is the loan money 'invested'.

Start using this offset money for personal use and you are no longer using the loan money for investing.

Cheers
 
The confusion will arise because China is proposing to draw the loan down and then place in the offset.

As such the money now in the offset is not personal money but in actuality is the loan money 'invested'.

Start using this offset money for personal use and you are no longer using the loan money for investing.

Cheers

Nailed it :)
 
So is it fair to say that the consensus from this thread is that to access equity from an encumbered PPOR in order to get deposit to invest, having a home loan with 100% offset, without using offset funds for personal use is better than LOC in terms of lower cost and taxation clarity?
 
So is it fair to say that the consensus from this thread is that to access equity from an encumbered PPOR in order to get deposit to invest, having a home loan with 100% offset, without using offset funds for personal use is better than LOC in terms of lower cost and taxation clarity?

china - there are two types of home loans.
Term Loan - this is your standard home loan with 30 year life and 5-15 year interest-only period. This is the cheapest/most common loan and if you pay it back early you have access to redraw and/or offset.

Line of Credit - generally more expensive and does not have a loan life. Interest-only for longer periods., plus can create unlimited splits. Main drawback apart from price is that the line of credit can usually be called in at ANY time. Loan can only be repaid into the loan itself and not with an offset - meaning you can contaminate funds very easily.
 
china - there are two types of home loans.
Term Loan - this is your standard home loan with 30 year life and 5-15 year interest-only period. This is the cheapest/most common loan and if you pay it back early you have access to redraw and/or offset.

Line of Credit - generally more expensive and does not have a loan life. Interest-only for longer periods., plus can create unlimited splits. Main drawback apart from price is that the line of credit can usually be called in at ANY time. Loan can only be repaid into the loan itself and not with an offset - meaning you can contaminate funds very easily.

So for the purpose described, it is best to go with the home loan with offset? LOC does not seem to be worthwhile if your investment horizon is not going to be longer than 15 years. And I guess you can always refinance the standard home loan to extend the interest free period for investment purposes.
 
So for the purpose described, it is best to go with the home loan with offset? LOC does not seem to be worthwhile if your investment horizon is not going to be longer than 15 years. And I guess you can always refinance the standard home loan to extend the interest free period for investment purposes.

Yes that's right.
 
Having an intervening offset account can potentially confuse the taxation situation. I find it safer and easier to just setup a garden variety loan and leave it undrawn until you need the funds. Then draw the funds by paying them directly to the vendor (settlement agent) when you settle on the property. That way there is a clear nexus showing exactly why you drew down the loan (to buy the IP). You can then split the loan if you wish once you know how much was required, if you have funds left over that haven't been drawn down.

The only downside is that for some reason while the loan is undrawn some banks keep sending letters saying "Congratulations! You have paid off your home loan!" etc. I just bin them...
 
My understanding of Chinas approach

Find property at say $2mil

Use LOC on PPOR for the 20% or even 30% contribution and then costs. So he will need $600k + stamps ($100k) + GST (unless going concern). You will be able to claim the GST back.

Get a loan for the balance - $1.4mil financed through seperate loan (different bank) with an offset facility

Total cost $2.1mil 100% financed with all interest deductible.

Throw the excess cash into the offset account thus preserving the cash separate from the investment.

Ends up paying interest on $1.1mil and is now effectively earning interest on his 'cash' of about 5.4% (the interest cost )

I use this method for all my spare cash and achieve maximum interest with no long term commitment as I can withdraw it at any time for new opportunities.

From your previous number you might be looking at a smaller investment but the theory is sound.

This is a bit misleading. China would not earn 5.4% interest on his 'cash'. He is a medico, so we can assume confidently he is in the top tax bracket, and therefore paying 45% tax on personal income.

Since the entire 2.1mil of debt is tax deductible, for any debt that he offsets using his cash, he will only be saving 55% of the interest (5.4%) on the offset debt, as the other 45% of the interest would be written off to tax.

E.g. He puts 1mil in cash into offset:
Interest (5.4%) before tax: 1mil*0.054 = $54,000
Interest after tax: 0.55*$54,000 = $29700 (or 2.97% net return after tax)

So effectively he will be only earning 2.97% after tax. Had the debt been non-deductible, he would make 5.4%, in which case this would be a sound strategy.

There are better ways to make greater than 2.97% after tax on your money than simply offsetting tax-deductible debt.
 
This is a bit misleading. China would not earn 5.4% interest on his 'cash'. He is a medico, so we can assume confidently he is in the top tax bracket, and therefore paying 45% tax on personal income.

Since the entire 2.1mil of debt is tax deductible, for any debt that he offsets using his cash, he will only be saving 55% of the interest (5.4%) on the offset debt, as the other 45% of the interest would be written off to tax.

E.g. He puts 1mil in cash into offset:
Interest (5.4%) before tax: 1mil*0.054 = $54,000
Interest after tax: 0.55*$54,000 = $29700 (or 2.97% net return after tax)

So effectively he will be only earning 2.97% after tax. Had the debt been non-deductible, he would make 5.4%, in which case this would be a sound strategy.

There are better ways to make greater than 2.97% after tax on your money than simply offsetting tax-deductible debt.

It's a sound strategy for the criteria being discussed, because he doesn't want to invest his $1mil. He want's to keep it liquid.

Best you can get from a bank is 2.7 - 4% on your money with the higher rate less liquid. Any better returns you are going to aim for are going to be even less liquid and/or higher risk.

Based on your analogy this drops to 1.35 -2% after tax.

Money in offset does 1%+ after tax than paying the interest cost and hoping to find a better after tax return.

Cheers
 
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