RLOC vs Offsest Account

Hi Resurrect, I used to have a RLOC but I refinanced it with a standard investment home loan plus offset account when I changed banks.
Here are some pros & cons (my opinions only)
Pros of rloc: 1.It’s very ready investment cash which is great if you want to buy and sell a more liquid asset like shares.
2. It’s also very easy to provide the 20% equity for a new home loan, especially if you are using a different lender.

Cons: 1. You have to pay mortgage stamp duty on the whole amount, even if you only ever use a small amount of it.
2. It’s very tempting to use it for private purchases. This is a big no-no with the tax man, even if you pay it back very quickly, eg when you get a tax refund etc. Example: If you have a rloc for $100k, and you decide to buy your wife a car for $20k, knowing you will be able to pay it back next month when your whatever cheque arrives. The ATO can claim that you have demonstrated that 20% of your rloc is for private purchases, forever ie as long as your rloc shall live, even though you paid it back quickly.
3. You have to pay FDT for every withdrawal because it’s a cheque account. (I find those little fees really offensive, even if they are relatively small, as they add up over the year.)
4. If you are just using the rloc for property purchases then it can be done with normal home loans, because they can tap into your equity just as easily.

I believe that some lenders just use rlocs as a marketing tool to try to dupe borrowers into believing they can pay their home off sooner, only because they are spilling much more principal into the loan then they realise. Mixing private stuff with an investment loan is an accounting nightmare. “Contamination” is my favourite word for this. You can get different sub accounts in the rloc if you really want to use it for both private and investment purposes, however.
The offset account achieves essentially the same thing, and keeps a nice firewall between private and investment stuff. The effect is fairly minimal though, eg my offset account has been operating for two years, and my bank shows me exactly how much interest I have saved so far. It’s about $950, which means that I’ve averaged about $7,900 in the account (7900 X 6% X 2 years). Just pure maths as I’ve stated before, without the smoke and mirrors lenders try to use. By the way, that’s $950 tax deductable dollars, so I’ve only saved 484 after tax dollars.
Just a few ideas. I’m sure others would have a few more.
Jim.

Hi Resurrect

CBA’s offset is very ordinary… so probably not indicative of a normal offset in the market. CBA LOC is too expensive. On the whole I don’t think CBA is the lender for you.

Perhaps try ANZ. It’s offset and LOC are exactly the same interest rate (which is becoming less common). They also offer the best LOC rate on the market… 5.97% (if account is over $250k).

The downside to ANZ is that they measure the interest rate discount based on the individual product (or loan) balance and not total borrowings with the bank. However, using a combination of LOC and basic variable loans (e.g. Money Saver product) can deal with this issue.

Returning to your question… what’s the difference… generally the only difference (in terms of product features) is that you may be able to capitalise interest. That is, not pay the interest and let it accumulate in the account. The only other difference is cost – LOC are normally more expensive.

This is a big topic to answer. I have just written 2,500 words to answer this question. I’ll let you know when the article is published (and I’ll post it on my website).

Cheers

Stu

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