Hi all
Because of the many loans etc. it can be confusing to select the correct stucture and at the same time feel confident that you have gained the most tax beneficial set up.
So for example a person that has a PPOR and wants to pay it down quickly and is disciplined with their budget a LOC may be appropriate.
A Person that has a PPOR and wants use it as an IP in the future then a different set up my be appropriate.
From what i have read i tend to think that an OFFSET account may be the better choice if one wants to convert there PPOR to IP in the future so paying it down would not be a good strategy.
Are Offset account Interest Bearing?
So lets take a person that has 3 IPs all at 80%LVR
eg. 100000 loan 80000
100000 loan 80000
100000 loan 80000at this point there is no buffer if things go wrong. All securities are not crossed.
PPOR 300000 loan 140000
So this person has 80% LVR = 240000
240000 minus loan 140000= 100000This 100000 could be a LOC dedicated to Investment buffers and shortfalls.
To position themselves to change the PPOR to IP use should the PPOR/IP Loan 140000 be linked to a Offset account so when PPOR becomes IP in the future the loan stays as is and the cash in the OFFset can be used for another PPOR.
The 100000 in the LOC would continue as normal.
Would this be the most tax effective way of doing it or has this structure have some problems for this purpose.
regards
AlfLine Of Credits are rarely needed! Only those wanting to be fashionable use them or those poorly advised. They have a cheque book – BIG DEAL!
They also cost more in most cases. What can you do with a LOC that you can not do with an interest only loan and offset account? The cheque book is a moot point.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi Rob
Thats interesting you say that. Alot of investors on this forum have good things to say in regards to LOC. Having them for Deposits etc
I am not quite clear what you are saying Rob but LOC do offer Flexibility don’t they?
cheers
And higher cost (in most cases). They are also riskier.
St George has this to say about the benefits of offset accounts:
* Every savings dollar is working to reduce interest expense and therefore the loan.
* Customers do not pay income tax on interest earned on savings and do not pay tax on the loan interest they save. So <the Offset Account> is tax effective.
* The discipline of regular repayments ensures the loan balance will reduce, unlike “line of credit” products.Like I said before, discarding the cheque book (which you can get on transaction accounts anyway), please tell me one benefit that a LOC provides that an offset interest only does not..
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi Rob
I respect your input and you deal with this stuff everyday.
So in your expert opinion what would be the correct structure for the example i opened with in this thread.
Apart from a LOC how else do you keep perosnal money and investment money seperate and ready for furhter investment. If theres a better way as i suggested thats what i am seeking clarification on.
At the same time keeping the integrity of the tax benefit.
cheers
alfA split seperates funds.
By the way, a LOC is renowned for causing people to mix up personal and investment money. It is one of the biggest problems with them.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdIf you have funds, wouldn’t you put them in an offset account? Or you suggesting you get an LOC to make available funds for investing in IP?
Byronent
Adelaide SAHi Alf,
If you intend to convert your PPR into an IP at a later stage, then I would suggest you look closely at the benefits of a 100% offset attached to your PPR portion of the loan.
In many situations an offset can offer greater benefits over a LOC,Hi Byronent,
You are correct, there is no need for a LOC regarding this scenario,
Cheers.Regards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hi all
Thanks for your responses. After speaking and posting and from replies i have seen i agree with the opinion that if one is going to change there PPOR to IP then the OFFSET ACCOUNT I/O is more appropriate over a LOC.
ROB
It is very easy to split the LOC into the personal portion and the Investment portion
BYRONENT
What i am suggesting is to have a LOC to make available funds for IP eg deposit.So PPOR Val 300000 owe 140000 equity 100000
PPOR Loan 140000/with OFFSET a/c I/O
LOC 100000 For deposits/shortfall/etc anything to do with investment use.If theres a better way then please feel free to share. This appears to give all the tax benefits also for when changing the PPOR to IP.
cheers
alfHi Alf, you don’t need an LOC
Why not consider this…
Set up a split loan
$140.000 PPR split A (non-deductible debt)
Investment split B $100.000 (deductible debt)
Place the $100K into a 100% offset account attached to your PPR split; use these funds as required for deposits on investment etc.Regards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Example Structure
$500,000 Property 1 Value
$200,000 Loan 1 – PPOR – Non-Deductible – Offset Account 1 Attached
$200,000 Loan 2 – Investment Money – Deductible – Offset Account 2 Attached
How It Works
Offset Account 1 – all income from work and other investments are deposited into this account. The minimum payment (preferably interest only on all loans including PPOR) is made to Loan 1 (and Loan 2 if used).
Offset Account 2 – the full amount of the loan is deposited into this account until needed. If the loan limit is $200,000 and the balance of this offset account is $200,000, your loan repayments are zero if the loan is interest only. If any of this money is used, the interest only repayments come from Offset Account 1.
The Benefits
1. Having all funds going into Offset Account 1 helps reduce the amount of interest you pay on your non-deductible debt resulting in excellent tax benefits.
2. The funds sitting in Offset Account 1 are also available for use if required rather than making unnecessary principal repayments.
3. If you want to change the property into an investment property at a later date and you have not made any principal repayments but left the money sitting in Offset Account 1, withdrawing the funds and pushing Loan 1 back out to the limit would result in full deductibility on the whole loan amount instead of whatever would be left if you had made principal and interest repayments. Loan 2, which is still secured against Property 1 is still fully deductible as it is the purpose of the funds that establishes deductibility.
4. This structure attracts home loan or investment loan interest rates and fees rather than the usually higher rates and fees associated with a Line Of Credit.
5. This structure does not require annual review as many Line Of Credit facilities require for a fee.
6. Increasing the loan limits is usually cheaper with this structure than increasing a Line Of Credit limit.
Important Notes
* A line of credit that is 0.1% higher than the above structure costs an extra $100 per year for every $100,000 to maintain on top of the annual fee (and other fees) of a few hundred dollars usually associated with these facilities. Most line of credit facilities cost 0.5% or more than the above structure. This is a lot of wasted money to be ‘fashionable’!
* Interest Only on the non-deductible portion of this structure is not recommended for those who are not good with their money as they may find they get into trouble very quickly. These people will definately get into trouble using a line of credit as well.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi
Thanks Steve and Rob. I get a little bit lost with this as i have mainly had LOC so lets see if if follow correctly.
Steven
Loan 140000(PPOR)non deductible
100000 (Inv)deductible
100% offset attached to PPOR Does this require two offset accounts as shown by Rob. One attached to PPOR and one to INV.If that is the case i understand as they are seperate.
Am i exposing the full interest of 240000 or only 140000 i am a bit lost here. as you say use these funds the 100000 to go in offset acount.
ROB
Thanks it looks workable. My only question would be about the rents etc going into the Loan 1 account as this is coming from the income producing asset.Shouldn’t i be placing the rents in Loan 2 as this is used for deposits and shortfalls etc.
I have this concern of own salary and investment rents and payments going into the same account.
I would think any payments for say painting the investment property would come from whats in loan 2.
cheers
alfNo offence to Steven’s model, but placing the money from the investment loan into the PPOR offset account will mix up the non-deductible and deductible funds. Although it reduces the interest you pay on your non-deductible debt, it also increase the interest you pay on your investment loan. These would most likeley be at the same interest rate and you would be in the same position cost wise. In any case, if the money is used for personal reasons, it is not deductible so it is not really doing anything until it is spent. That is why I suggest using two offset accounts.
Regarding rents and expenses from your investments, you can place these where you like. The fact of the matter is that if they sit in your PPOR non-deductible loan Offset Account 1 for any period of time, this reduces your non-deductible debt. If they go into your Investment deductible loan Offset Account 2, they reduce your tax benefits.
You would receive rental statements and receipts for expenses regarding the property so accounting for these is not difficult. Basically, at tax time, you give the accountant your investment loan statement and your receipts and say this is deductible and hand them the PPOR statement and say this isn’t. You only need to pay for things out of Offset Account 1 when there is no more available funds in Offset Account 2.
If you paid for expenses straight from available funds in Offset Account 2, it is a simple case of your deductible interest expense increasing as repayments on these new investment expenses would also be interest only. You would still need to provide receipts to your account.
The model I have outlined just shows how you can keep things as tax effective as possible while leaving yourself with access to the maximum amount of available funds possible and still quickly reducing your non-deductible debt.
For your info, once the funds in Offset Account 1 is equal to the limit of PPOR Loan 1 (and the money was not from an investment loan), your non-deductible debt is gone. Drawing down on this loan would then be fully deductible if used for investment and you would still have the full $200,000 available. Any future offsetting can be done against either loan if you want to reduce your loan sizes which will also reduce your deductions (which I think is better!)
You might consider getting a seperate standard transaction account at this time for non-deductible use or to deposit income if you no longer want to offset against your deductible debt.
You might even take another Split (a small amount for personal use) and set up Loan 3 with Offset Account 3 and go on holiday or buy that new car or whatever other non-deductible spending you want to do, but keep it to a minimum!!!
I hope I have not confused anyone. If you have any more questions why I like this structure, don’t hesitate to ask. PM or email is fine if you don’t want to ask here.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi Again
Excellent responses Rob. Clear Concise and understandable.
Thnakyou again and a Happy New year.
Happy New year to Everyone
cheers
AlfAlways a pleasure!!!
[biggrin][biggrin][biggrin]
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdQ on Finance equity finance. A property is bought for 200k it appreciates to 300k will a lending instituation accept the 100k gain as a deposit on an additional property which would also require the balance in finance.First time on this site,from Perth.
In most cases, they will use 80% of equity. In your example, if you bought the property for 200k and had a 160k loan on it and then the property value went up to 300k, you would be able to increase the loan or refinance to 260k to cover your existing loan and use the extra funds as you like as you like.
Of course, if you owed 200k already, you would only get 80k extra.
This may change with different lenders as some will go higher if you pay mortgage insurance and other will be lower if you cannot verify your income.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi All
I am a newbie Poster and a fairly new property investor.I have read the posts comparing a revolving LOC
with 100% offset Interest Only accounts and I am a bit confused.On my PPOR I have a LOC which for all intents is an interest only loan which gives me access to the equity so that I can invest in other areas, plus day to day expenses come out of the account and our salaries are paid into it.
I also have two investment properties that are set up as Interest Only loans that are negatively geared, as these are interest only loans the outstanding principal does not change each month as I am only paying interest, how does this compare to an interst only loan with 100% full offset that has been discussed on this forum ??
I am considering buying another investment property in the near future with a IO loan, and I want to have some of my equity invested in the share market,one mortgage broker I have spoken to has suggested I change the loan on my PPOR from a LOC to a P&I loan and then set up a seperate LOC for share investing, is he looking after my interests or his ??
My wife and I have a combined high income so tax implications are definitely an issue so we would need to seperate a LOC for investment purposes from one used for private.
Any opinions or suggestions will be appreciated
brownegaz
[confused2]My opinions on LOC are all through this thread. If any part is unclear, feel free to ask about that part.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
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