Why use LOC

[Aikido]

Hi all,

Just got to thinking and would appreciate other people's input into this.....

A lot of ppl in this forum seem to favour a LOC facility to access excess equity in a property. Given that this facility attracts a higher interest rate as well as a monthly fee.......... what is wrong with just refinancing your property to 80% and repaying the amount back into it. Given that there is a redraw facility you can use these funds at anytime and it would be at your current variable rate with no monthly fees.

Isn't this better than a lOC or am I missing something

 

[Fester]

Personally I like the LOC. I have two on my PPOR, one the old home loan, the other I draw on for the IP costs. And I am on a Westpac Pro Package so no monthly fees and a 0.7% interest deduction. It makes accounting easier too, in that the IP component is separate from my home loan. Both LOC are interest only, including my old home loan, and I like it that way because if my cash flow is a little on the low side I only need to make the minimum monthly interest payment and if I want to make a healthly payment anytime, I can.

Fester

 

[WillG]

Aikodo,

LOC's do give a good level of flexibility.

Refinancing (depending on the loan) costs $$ in admin & revaluing costs.

If you know exactly what you are going to need in your loan package then get the cheapest package and refinance as you say.

Investments often come up at 'inconvenient' times and it may be easier to write a cheque from your LOC to buy into the investment.

The 'Westpak Pro Package' Fester has is a hybrid LOC with a good amount of flexibility. It seems like a package specifically for active investors.

I consider the flexibility of LOC's and similar packages (100% offset acounts etc ...) worth the extra $$'s. They are valuable tools in my investment stratergy & help me to move fast when buying investments.

Hope this helps

 

[sbe]

If you want a "clumsy" version of LOC, that's one way around it.

However, be aware of the limitations.

LOC
Pro = Immediate access, no fee (ok, besides the normal fees)
Con = Can be a little too easy to spend that money ;-)

Redraw
Pro = Can be cheaper
Con = Delayed access, minimum redraw amount, some limits on amount (must a multiple of $500 / $ 1000 etc), paperwork, time to do it all (banks open when you work....), fee for redraw

In the end, as long as you know the good and bad of both, choose your weapon of choice...

I prefer the access and service of LOC. I'm willing to pay the little more for the flexibility, access and service.

Cheers

Simon.

 

[GeeVee]

Just a thought

At least with a LOC you can pay a deposit on your IP['s] and the bank doesn't need your PPOR for security. They will grab alll the security they need and MUCH MORE. Your ability to stay in the market must surely be enhanced?

 

[johnnyb]

Simon,

The cons for the redraw facility are not necessarily as many as you suggest. Until recently I had a standard variable mortgage with redraw facility with the CBA. Apart from the minimum redraw amount (can't remember what it was, maybe $2000?) I used it like a savings account - I could transfer funds (in both directions)between it and any of my normal savings/cheque/credit card accounts instantly using phone or internet banking.

John.

 

[Aikido]

Hi,

Given that the intention is to use the excess equity to purchase another IP then can you not use the redraw as a form of LOC. Minimum for the redraw wouldn't be an issue (unless you can buy good property now for less than $10,000). Additionally having an offset account attached to this I believe that the redraw would give you the same effect as an LOC.

At least with a LOC you can pay a deposit on your IP['s] and the bank doesn't need your PPOR for security. They will grab alll the security they need and MUCH MORE. Your ability to stay in the market must surely be enhanced?

By redrawing from the property to pay for the deposit you will not be xcoll. You will achieve the same result as the LOC

As I understand it there is generally no charge for redrawing and with internet banking you can do your banking 24/7.

I still don't see why the LOC is better than the redraw. Perhaps Rolf can help.

 

[Rolf Latham]

Hiya

There is NO right or wrong just better in various circumstances

Essential differences.

Many term loans with Interest only do NOT have redraw.

Term loans generally have 5 max 15 years interest only period, LOCS are full term interest only usually.

Term Loans have reducing balances whereas most LOCs are evergreen, meaning they can be fully drawn back to the limit.

LOcs are generally repayable on demand.

LOCS generally are harder to get LMI for, so lending above 80 to 90 is not easy. Some lenders do go to 90, but many only to 80 %.

Sometimes a better mix is term loan with interest only with an offset acct. This can be refinanced up to 95 % in some circumstances.

Most people like to use Locs alos because it keeps the PPOR and IP debts separate

Ta

rolf

 

[bready]

Hi all,

A fair bit has been mentioned of the relationship between equity and a LOC but does anyone know what criteria is generally used in relation to servicability?

Kind regards

Bready

 

[Rolf Latham]

Hi Bready

Service models btwn different lenders vary hugely.

Generally its net disposable income has to cover repayments after deemed living costs, often wth a buffer.

ta

rolf

 

[saskatoon]

Hi Aikido.
I think it's a question of accounting, and depends on whether you are redrawing against a home loan (PPOR) or redrawing on an IP.
If redrawing against a home loan you have to apportion your interest for non-deductible and deductible purposes. Can be tricky if you redraw for an IP; then redraw for consumer items, and then redraw for IP repairs, etc!
Using a separate LOC or other sub-account makes it simpler.
Similar probs. would arise if you redraw equity from an IP to use for personal purposes, though I know this is not your intention!
Terry

 

[steven]

Originally posted by Fester
Personally I like the LOC. I have two on my PPOR, one the old home loan, the other I draw on for the IP costs. And I am on a Westpac Pro Package so no monthly fees and a 0.7% interest deduction. It makes accounting easier too, in that the IP component is separate from my home loan. Both LOC are interest only, including my old home loan, and I like it that way because if my cash flow is a little on the low side I only need to make the minimum monthly interest payment and if I want to make a healthly payment anytime, I can.

Fester

The westpac pro package sounds interesting, can anyone tell me if they are available as a lowdoc as i am self employed, and if so would the 0.7% deduction still apply in this case.
Regards Steven