All Topics / General Property / Line of Credit questions

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  • Profile photo of BenJonesBenJones
    Participant
    @benjones
    Join Date: 2003
    Post Count: 23

    Hi all,
    It’s been suggested by my mortgage broker that I apply for a LOC on my existing property (being rented at the moment) then use that for deposits for IPs and apply to other lenders for finance when I’ve found suitable properties.

    Does anyone here have experience going that way for property purchases? Is it better than just getting mortgages for individual IPs? What are the big advantages of having a LOC?

    Also, will having a LOC limit or tie me up me in any way for the future as far as getting more properties goes (assuming a fair bit of it is used for deposits)?

    Is it advisable to apply for as much as possible for my LOC on my existing property or should I just use a percentage of it?

    How is an LOC paid back (monthly payments a % of ammount used like a credit card, or what)?

    Lots of questions I know, but any + or – experiences would fill in the gaps a bit. I’ll be speaking to my broker again soon but just wanted to hear from other investors as well.

    Thanks.

    Profile photo of ShusharShushar
    Member
    @shushar
    Join Date: 2003
    Post Count: 190

    In my experience to use a LOC properly you need to be very disciplined.

    The drawings, for the interest to be tax deductable must be used only for investment purposes. You can’t draw on your LOC to pay for the groceries.

    Repayments are usually the interest only. So again, the temptation is to only make that payment and not reduce the principle.

    The advantage is the flexibility. If you need money fast, it is there for you without having to reapply for it each time.

    Used sensibly I think they have many advantages.

    Shushar

    “All our dreams can come true, if we have the courage to pursue them.” – Walt Disney

    Profile photo of Buzz LightyearBuzz Lightyear
    Participant
    @buzz-lightyear
    Join Date: 2003
    Post Count: 43

    BenJones,

    I have recently undertaken what you are contemplating. For me, the LOC is there to fund next IP purchase. Also set up offset as well, which I think is good value to park any other savings and have pay being paid to linked account.

    In terms of impact on future IP purchases, my understanding is that they will calculate your debt as the loan amount plus LOC amount. However, given that you would have been approved for the LOC, servicing is obvioulsy not an issue.

    James

    Profile photo of BenJonesBenJones
    Participant
    @benjones
    Join Date: 2003
    Post Count: 23

    Thanks Shushbar,

    So am I right in assuming that all of the current equity will be tied up in the LOC if I was to apply for the maximum ammount? ie. Once the LOC is established the equity is then used up even though it’s not spent?

    Probably an obvious question for a seasoned investor, but a complex enough one for me at this stage[?].

    Comments welcome :)

    Profile photo of BenJonesBenJones
    Participant
    @benjones
    Join Date: 2003
    Post Count: 23

    Hi Georgisj,
    Thanks for your comment there. You got in before me and answered my question re. the LOC being takien into account in future borrowing. All the more reason to be very disciplined with the LOC.

    Question: Did you (or anyone reading this) apply for the maximum ammount for your LOC or did you go for less than you could have? Just want to get a feel for how it’s helped investors ie. the more the better vs keep it low.
    I realise that it would depend on the need of the investor, but I’m looking to get 2 properties and I’m pretty sure the LOC ammount offered will be much more than I need for deposits etc.

    Profile photo of Buzz LightyearBuzz Lightyear
    Participant
    @buzz-lightyear
    Join Date: 2003
    Post Count: 43

    I went for the maximum amount. Obviously, that was linked to my ability to service and the new valuation. However, I thought the higher LOC available, the greater options I would have, as I had not at the time, identified next purchase. My LOC is not a huge amount in anycase (50k).

    James

    Profile photo of Mortgage HunterMortgage Hunter
    Participant
    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781

    You generally pay a slight premium for a LOC.

    Why not apply for a raise in your home loan with a split so it is seperately itemised.

    Draw it as you need it.

    If you use a Professional Package then the rate will be under the 6.5% mark. Using a discount lender will see it around 6.35%.

    Loss of flexibility I hear?

    How flexible do you need it to be. I can write a cheque for a deposit. Fax my lender and have the money in the cheque account in less than 24 hours. If I am taking a day or so to decide on a purchase then the money can be there before I write the cheque.

    Just some food for thought.

    Cheers,

    Simon Macks
    Mortgage Broker
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Ben

    That is a good strategy that you have described. ie set up a LOC (or redraw, it doesn’t matter) and then take deposits from this account for the new IPs.

    When you go for future loans, the lenders will want to assess yuor serviceability on the full limit of the LOC, not just the outstanding balance, so it will affect your serviceability in that sense.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of DevoDevo
    Member
    @devo
    Join Date: 2003
    Post Count: 28

    We have also just done what James has done i.e. LOC + Offset account however we also changed our mortgage from P & I to interest only with a view to creating more cashflow.

    Cheers
    Devo

    Profile photo of BenJonesBenJones
    Participant
    @benjones
    Join Date: 2003
    Post Count: 23

    Thanks for the feedback.
    I am also thinking about IO loans for the next couple of mortgages to increase the likelihood of cf+. Maybe even paying more than 20% deposit for IPs (if possible), using the LOC.
    Any experience or advice with this?

    Profile photo of Kiwi-FullaKiwi-Fulla
    Member
    @kiwi-fulla
    Join Date: 2002
    Post Count: 371

    Hi Ben,

    All I can suggest is that if you are about to change into anything …. read the terms and conditions over and over until they make abolute sense. I often go through all the contracts with a pencil and mark anything that confuses me due to ambiguity or poor definition and then go over it with a fine tooth comb (move to and fro when they reference the schedules- don’t let hte legal team win the fight for common sense)…. just a tip from me …. make sure you are aware of any changes to the following areas … as they are sometimes well hidden and sometimes can be confusing in the schedules.
    Things to look for:
    Exit Fees, Discharge fees, Mystery fees, Rate Break Fees (and Calculation tables), Prepayment fees and lock in timeframes (12months or 2years).This is especially applicable with your current loan contract and moving for fixed terms.
    add up all the entry costs and then exit and future lock in costs and exit fees… this will let you see a real picture of what the lender is trying to do and you will see how flexible and inflexible they are.
    Well thats my ten cents worth!!!!
    Cheers
    Kiwi
    [:p]

    Profile photo of JuliaJulia
    Member
    @julia
    Join Date: 2004
    Post Count: 217

    Ben,

    It is dangerous to use a line of credit facility on a rental property loan when you will be drawing funds back out to pay private expenses. Based on the principle that the interest on a loan is tax deductible if the money was borrowed for income producing purposes, the interest on a line of credit could easily become non-deductible within 5 years. For example: A $100,000 loan used solely to purchase a rental property in financed as a line of credit. To pay the loan off sooner the borrower deposits his or her monthly pay of $2,000 into the loan account and lives off his or her credit card which has up to 55 days interest-free on purchases. The Commissioner now considers there to be $98,000 owing on the rental property. In say 45 days when the borrower withdraws $1,000 to pay off his or her credit card the loan will be for $99,000. However, as the extra $1,000 was borrowed to pay a private expense, viz the credit card, now 1/99 or 1% of the interest is not tax deductible.
    The next time the borrower puts his or her 2,000 pay packet into the account the Commissioner deems it to be paying only 1/99 off the non-deductible portion i.e. at this point there is $96,020 owing on the house and $980 owing for non-deductible purposes. When, 45 days later, the borrower takes another $1,000 out to pay the credit card, there will $96,000 owing on the house and $1,980 owing for non-deductible purposes so now only 98% of the loan is deductible, etc, etc.
    In addition to the loss of deductibility, the accounting fees for calculating the percentage deductible could be high if there are frequent transaction to the account. The ATO has released TR2000/2 which confirms this and as it is just a confirmation of the law is retrospective.
    To ensure deductibility and maximise the benefits provided by a line credit you will need an offset account that provides you with $ for $ credit. These are two separate accounts – one a loan and the other a cheque or savings account. Whenever the bank charges you interest on the amount outstanding on your loan they look at the whole amount you owe the bank i.e. your loan less any funds in the savings or cheque account.

    [email protected]

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