All Topics / Help Needed! / Line of Credit experience

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  • Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Hi Everyone,

    Has anyone had any experience using a Line of Credit to pay off their home loan?  Advantages/Disadvantages.
    We are very disciplined with out money and have a pretty decent budget we adhere to.

    Just wondering whether it is worth the extra 0.1% that banks seem to charge to take out a LOC.

    We also have an investment property that is set up as a fixed/variable loan.  If we direct the rent money into the LOC account then pay the interest off the investment propety will that seen to be cross contamination of the loans?

    Thanks

    Woodie

    Profile photo of itsandrewitsandrew
    Participant
    @itsandrew
    Join Date: 2007
    Post Count: 294

    Hi Woodie,

    I have a LOC for my PPOR.  I'm disciplined with my spending so have had no problems from that angle but it can be a trap for others.  Good thing is that you only pay interest on what you take out.  But this can be achieved with an IO loan and an offset account. 

    I'm about to refinance my PPOR loan over to IO with offset.  It keeps it seperate from other uses I may have for my money. eg. I will be opening up a LOC solely for investing purposes.  Good thing about that is that all investments will come out of the one place and tax deductible interest will be very simple to work out.  Deductibility is based on the purpose for which you use the money so it will be simple to work out.  An LOC for PPOR which has investment money taken out gets messy.

    Hope this helps. 

    Andrew

    itsandrew

    Go as far as you can see and you will see further.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Hi Woodie

    I don't like using LOCs like you have described. I believe they should only be used for accessing equity for investments. Using a IO or PI loan with a 100% offset will have you the same interest and work out better.

    LOCs are particularly dangerous for tax reasons. They are a loan, so evey deposit is a repayment and every withdrawal is new borrowings. You can get into a big mess is you were to use the LOC for daily transactions and then later move out of your house and rent it – You could have a huge loan with none of the being interest deductible.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Ok that's good to know.  Thanks guys.

    I did read that the way to use a LOC account is to pay for everything on your credit card (obviously within budget) and at the end of the month pay it off in one lump sum.  Thereby minimising the intereste payable on the loan as its daily reducing.  So the more in the account for longer the better.

    If we werent to deposit the investment money into the account would that make a difference?
    Or should we simply forget about using a LOC altogether?

    Thanks

    Woodie

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    forget about it altogether is my advice.

    You can achieve the same interest savings with the 100% offset account – in fact you will get more savings as the rate will be lower.

    You should put the rent into the offset account as this will save you additional interest. Use of the credit card will also save you interest as your mum will be in your account longer.

    With a LOC it wont matter if you put the rent in or not, the affect of constant deposits will mean your potential deductibility is decreasing.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Maybe an example will help.

    eg You buy a house for $100,000 borrowing $100,000. You have an interest only loan. Later you move out and start renting it. The interest on the $100,000 is fully deductible as this $100,000 borrowed was used to purchase the house which is now income producing.

    But, say you used a $100,000 LOC to buy the house. You then get wages and rents etc put in each month. say this is $10,000 to make it simple. You then take out $9,000 for expenses each month. net result is you are paying down the loan by $1000 each month – ignore interest for a min.

    Now because you are repaying $10,000 each month you are reducing the amount of money attributable to the purchase of the house. Each $9,000 is new borrowings which cannot be attributed to the house. Think of them as separate loans for private expenses. The result is after 10 months you would have a $90,000 loan, but none of it was borrowed money attributable to the house so none of the interest is deductible.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of number 8number 8
    Participant
    @number-8
    Join Date: 2010
    Post Count: 333

    Absolutely No need to use a LOC unless you have multiple properties and want to capitalise interest and adjust credit limits.

    A regular loan with an offset account will do exactly the same for the vast majority.
     
    http://www.birchcorp.com.au

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Thanks Terryw that example was really helpful.

    We'll definitely ditch the LOC idea altogether.

    The property we're looking at purchasing would be our PPOR with the potential for it to be used as an investment property in the future. Maybe in 2-3 years.  It would still be worth paying PI wouldnt it?

    We're with CBA and looking at remaining with them so we'd have our investment loan and our PPOR loan.  Do you see any problems with that?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    i would use an IO loan, especially if it will possibly become an investment. I hear that the CBA offset account ain't too hot.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Oh ok in what way.  Any other recommendations?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Any of the other major banks, ANZ,  Westpact and NAB have good accounts.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    What do you see as a deficiency in the CBA offset account?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    I don't really no anything about it, but there was another thread here recently which described it as non-transactional and minimum balance requirements.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Thanks, ill look into it.

    Profile photo of Dan42Dan42
    Member
    @dan42
    Join Date: 2008
    Post Count: 620
    Woodie wrote:

    What do you see as a deficiency in the CBA offset account?

    It's not a full transaction account, deposits and withdrawals havea $500 minimum, and an initial deposit of $1000 is required. Its called a Mortgage Saver, and to withdraw money from this, you need to transfer it to a Streamline account, then to whoever you want to transfer it to.

    Apart from that, it's great!

    Profile photo of WoodieWoodie
    Member
    @woodie
    Join Date: 2010
    Post Count: 13

    Cheers Dan.

    So the other banks don't have minimum deposits and withdrawals etc? 
    We have a MISA account for our investment property which im guessing is the account your referring to.
    It would be nicer to have an account that is a bit more user friendly if we're using it as a main account.

    Profile photo of Dan42Dan42
    Member
    @dan42
    Join Date: 2008
    Post Count: 620

    Hi Woodie,

    I think the Westpac offset account is a everyday transaction account, but I'm not totally sure. The finance gurus will have some more information.

    Profile photo of dr housedr house
    Participant
    @dr-house
    Join Date: 2001
    Post Count: 281

    having paid off our home loan quite some time ago, I used my home for a line of credit.
    I find it an excellent product for it's flexibility and the ability to have wages and rent paid into it.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Dr house

    If you have paid off your home loan i assume you are using the LOC to access equity for investing.

    Are you aware of the tax consequences of paying or depositing into the account?

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of jacqui_03jacqui_03
    Member
    @jacqui_03
    Join Date: 2010
    Post Count: 142

    Hi Woodie,

    I would highly recommend you listen to Terrys advice as he opened my eyes to the disadvantages of LOC's and advantages of 100% Offset Accounts. I used to read how good LOC's were for investment properties however I now agree with Terrys opinion that you are far better off with an IO loan with a 100% offset account over LOC due to the all the tax implications of using a LOC. I will only use a LOC for assessing equity (drawing 20% deposits for next IP purchases).

    Thanks again to Terry .. and Richard (Qld007) who always give the most helpful advice. I am very thankful they answered my previous thread on this topic and gave me their honest opinions as I would of structured my IP loans using LOC's and it would of gotten very messy in the future.

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