I noticed that a lot of investors choose a Line Of Credit over an Offset account. After comparing the two, I cant see why a LOC would be superior..?
If an Offset gives you the same quick access to your equity, then why pay more interest and fees for a LOC..??
Thoughts…????[blink]
Ask yourself “Do I have the COURAGE to be free….?”
Its all to do with taxation.
If you take money from on offset, it is not borrowings, so the extra interest incurred if used for investments is not deductible (unless the original loan was).
Taking money from a LOC would mean the extra interest is deductible.
Which do you need will depend on your circumstances.
If you have a home loan, generally a offset is better. Save all you can in the offset, then when you want to invest, pay down the home loan and redraw (ie borrow). This reduces non deductible debt while increasing deductible.
If you have an investment, you would also be wise to use an offset to save extra funds. Do not put them off the loan as you will create a mess, taxwise, if you take them out again for general living expenses.
If you have a property with equity, generally a LOC would be better if you are going to use this just for expenses such as depsots, paying rates etc.
Terryw
Discover Home Loans
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one more thing, some lenders charge a bit more for the LOC, around 0.10% extra. Sometimes a standard loan with a redraw can work similar, but have a lower rate.
Terryw
Discover Home Loans
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As Terry points out sometimes you may 0.10% extra with a LOC.
With a PPOR you might decide that you wish to rent the house out after all and want to try and obtain the maximum interest deduction. If the principal on the loan has been repaid then redrawing these funds down mean they will not be tax deductible.
If you merely take them out of the offset account then the interest is adjusted to reflect the gross loan balance and the total monthly amount is still tax deductible.
Other than a few slight variances the interest calculation is much the same.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
thanks for the response guys…
I didnt mean to post this so many times. My connection was slow, so I think I may have clicked “post” a few times to many….
Thanks again for your responses…
Cheers[biggrin]
We have a PPOR and three IPs, all on interest-only, var rate loans.
We are looking at setting up an offset account to simplify our currently complex network of accounts and loans.
We’ve got a split loan on our PPOR, and are thinking of attaching an offset account to the variable portion. We then want to have the monthly deductions for our 3 IPS made from this account, + have our tenants pay rent directly into this account (and direct a portion of our salaries into this account, as well as covering the payments on the fixed portion, of-course, fixed until Nov 08 at 6.69%).
We also plan to make all IP-related payments (ie: council rates, water etc) from this offset account.
Does all the above sound like a good plan?
The current rate on the variable portion of our PPOR is 7.49%, but the offset account rate is 7.79% so it will be costing us a bit more. But we are thinking that it is worth it for the increased convenience as well as the potential to reduce interest repayments (just a little) by having more money sitting against the var portion of our PPOR loan.
Thanks for any advice,
CarlinHi Carlin
The plan sounds ok on the surface. Couple of things:
1) Make sure the PPOR is also interest only as well rather than P & I – not all lenders offer this.
2) The current rate on the variable portion of our PPOR is 7.49%, but the offset account rate is 7.79% so it will be costing us a bit more – You have lost me here. The offset rate cannot be higher than the interest being charged on your PPOR.Are you sure it is a 100% offset A/c and not a variation on a theme.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Hi Carlin
The plan sounds ok on the surface. Couple of things:
1) Make sure the PPOR is also interest only as well rather than P & I – not all lenders offer this.
2) The current rate on the variable portion of our PPOR is 7.49%, but the offset account rate is 7.79% so it will be costing us a bit more – You have lost me here. The offset rate cannot be higher than the interest being charged on your PPOR.Are you sure it is a 100% offset A/c and not a variation on a theme.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Richard, I think Carlin was implying he had to switch loan types to one with a higher rate.
Carlin – is that correct? I think the rate is a bit too high. Depending on the loan amount you should be paying around 7.37% with a major bank on one of the propacks. And Bankwest offer the Lite Plus home loan at around 7.35% – from memory, with 100% offset.
Terryw
Discover Home Loans
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Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Apart from the fact that the LoC gives you access to just that credit, which you could use as a deposit for another property or to pay for renovations etc.
Neil and Kate Gorman
Mortgage Broker
Mortgage Choice – there’s only one choice
tel: 0430 500 848
e-mail: [email protected]Hi all,
I've just come across this forum post as I have been racking my brains trying to also figure out the difference advantages/disadvantages of LOC vs Offset.
If I currently have an investment property with the accounts in a simple structure like:
- Loan Account (Variable Interest Only) – $200,000
- Offset Account (100%) – $60,000
- Equity available (due to a recent valuation but not yet drawndown) – $100,000
Offset
The way I saw it was that I have the flexibility of my $60,000 cash sitting in my offset account which is able to pay for a deposit on another property, renovations or any bills/expenses. Also Rental income could go directly into this offset account. This account became self sufficient so to speak without any intervention or transferring of more funds. In the meantime while nothing was happening at least it was reducing my Loan Accounts interest calculation base on effectively $140,000.
If I really wanted technically I could drawdown on my equity and place the new found cash into my Offset Account thereby increasing the Offset Account's balance to $160,000 and significantly reducing my monthly interest repayments to the basis of only $40,000.
LOC
However, similar to BreakEven, I met with a mortgage broker who advise me to use the $60,000 to pay down the loan account to $140,000 and then open a new line of credit account for the $60,000 + $100,000 = $160,000. I'm truly still puzzled why this would be a better choice? It seems that now my interest is calculated on a much higher loan base of $140,000 + I don't have any more money left in my Offset account and all i'm left with is a Line of Credit account of $160,000 which I may or may not use but it has no interest advantages while sitting there.
How is this any better? Seems worse that I'm paying so much more interest now.
I must be missing something significant here.
Regards,
VeryConfused
If you accesed the 100k equity your loan would increase to 300k and your offset account would have 160k in it so interest would be calculated on the difference being 140k making no difference
To answer your concern accuratley it would be best if you could shed some light on the intended purpose of the 100k available equity in the IP.
Also would be helpful to know if you have a PPOR with any debt on it?
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
jate wrote:If I really wanted technically I could drawdown on my equity and place the new found cash into my Offset Account thereby increasing the Offset Account's balance to $160,000 and significantly reducing my monthly interest repayments to the basis of only $40,000.
(You are confused – you would be borrowing $160k to put in the offset, so your repayments would be based on an extra $160k loan too.
Also you would lose deductibility of interest if you borrow money and place in an offset account with other funds – Domjan case.
Be very careful about this. I am speaking with a client whose broker recomended this and we are going to sue the broker because of the lost tax deductions. (also another broker has stuffed up clients trusts set ups and was giving legal advice so we are looking at him too)
Get tax advice – from someone qualified such as a tax agent or lawyer.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
FMS wrote:If you accesed the 100k equity your loan would increase to 300k and your offset account would have 160k in it so interest would be calculated on the difference being 140k making no differenceYes – of course! Silly me! How did I miss that. Totally embarrasing.
Ok so that would mean that the interest calculation would be the same (assuming that the new LOC rates are the same as the Loan/Offset one)
FMS wrote:To answer your concern accurately it would be best if you could shed some light on the intended purpose of the 100k available equity in the IP.
Also would be helpful to know if you have a PPOR with any debt on it?
My intended purpose of the 100k available equity in the IP (solely under my name) is to use it to grow my portfolio and buy more IP's along with pay for any expenses which that might incur in doing so such as buyer agency, deposits, building & pest inspections, loan setup fees and then later for the ongoing fees like utilities, borrowing fees, interests etc.
Yes I also do have a PPOR (shared with my wife) worth about $800,000 and a current loan balance of $600,000 with about $200,000 (cash of mine) in its offset account which I have been saving over time. The only reason I parked the money there was to lower the interest repayments while I figured out my next move. That is where my mortgage broker als othen suggested I do the same here on my PPOR. That is, use the $200,000 life-savings to pay down my home loan to $400,000 and then open up a Line of Credit for $200,000 against my PPOR to be used for Investment purposes.
Originally, I was trying to keep the accounts in my PPOR separate so that it wouldn't mess up anything with our own joint situation or affect my wife tax, accounts or what not while I continue to play with my little side hobby of property investing. However, of course, like everyone I'd like to minimize my non-deductable interest payments and maximise my deductable interest payments in the best structure possible without breaching any laws.
Any reason why you dont move the 60k from the IP offset to join the 200k in the PPOR offset therefore minimising interest payments that are non deductable and maximising deductable debt on the IP? I dont think paying down your IP debt with the 60k in the offset is a good move based on the informtion disclosed thus far.
As Terryw stated best to get advice from an acountant/tax agent or lawyer before proceeding on advice from a broker to avoid a world of pain down the track.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
Agree with Colin above. To optimise your repayment structure, the $60K in the loan offset linked to the IP should be in your PPOR offset account.
At a 5% interest rate, that's about $3,000 a year in interest deductions that you are missing out on.
Cheers
Tom
FMS wrote:Any reason why you dont move the 60k from the IP offset to join the 200k in the PPOR offset therefore minimising interest payments that are non deductable and maximising deductable debt on the IP? I dont think paying down your IP debt with the 60k in the offset is a good move based on the informtion disclosed thus far.Well previous (before reading these forums and didn't know better) I always thought the $60k which was via IP could not be mixed with PPOR funds. Basically, the $60k was an amount just to indicate a scenario where you would have a bunch of money leftover from loan borrowed, but not used + some rental income which was then used to just pay expenses direct from the same IP offset account.
Based on all the advice here and on other threads. I'm currently in the process of refinancing and fixing my rates, got rid of the offset accounts in the IP (as now I don't see any use for it) and pulled the equity out to start a new LOC account where I'm just going to use that now to pay all the expenses from my IP's. and of course, redirect all rental income to my PPOR Offset.
Seems like the best way to go moving forward.
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