Loan Structures

Hi Deb and Karl

A line of credit is a type of loan.

A 100% offset account is a feature of a loan. It's like a savings account attached to the loan. If you have a $10 loan and you place $1 in your offset account, then you only pay interest on $9.

I'm not sure why Margaret Lomas recommends a LOC over a standard interest only loan. They are generally more expensive and usually an interest only loan with an offset will provide the same outcome (albeit at a lower rate).

I enjoy the books from Lomas but her thoughts on IP financing can be baffling.

Cheers

Jamie

I’m no expert in these matters but I’ve got 4 properties currently (1 PPOR & 3 IP) whereby I’ve taken loans (secured individually, no cross collateral) from couple of lending institute. I’ve recently re-valued my PPOR and another 2 IP to top-up 80% LVR for equity access. My PPOR is fully paid-up but I’ve taken 80% loan against its current value which is used to fund 20% and extra costs for investment property purchases (eg. stamp duty). This loan I refer to my “Invesment Loan” which acts as my LOC.

I take up 80% loans for each of my IP and fund the balance amount from my “Investment Loan” until my IP grows to fund future IPs. I’ve taken the option of offset for each of my loans so that I can have the flexibility of moving extra available funds into the offset of the loan that has the highest interest rate currently. I keep track of these through a simple spreadsheet I’ve created.

All my income comes into the offset of my “Investment Loan” whereby the funds are parked there until I need to make monthly interest payments for the other IP loans as well as my regular expenses like my credit cards / personal expenses. Keeping funds in offset ensures that I minimise the interest payment for the loans while having the flexibility to use the funds for personal use as & when required as I’m not drawing it down from the loan itself.

Cheers’
NM

While I agree that there are some good lenders offering good rates with no fees, I would suggest doing some due diligence to ensure you aren’t getting a bad product. I highly recommend using a Mortgage Broker rather than testing the waters with some online lenders which lure you to attractive rates but have poor customer service & in the long run, you could end-up with higher rates and high cost to refinance. I have had a bad experience with Pacific Mortgage Group (http://www.pmgonline.com.au/) and would suggest that you are careful with your options.

Hi Terryw,

Thank you kindly for your feedback and would appreciate your thoughts on asset protection and tax effectiveness. Do you have any specific steps that I could take?

Regards,
NM

Thanks Terryw – I'll look more into it

Hi Karl,
I agree to most of what has been said above.
Line of Credit can be great product to reduce you debt and pay off you loan as soon as possible, in my experience most Financial Planner will recommend this product to help their client reduce their clients debt as soon as possible.
It all depends on the features of the LOC (Line of Credit) and making sure that it suites you and your family. One of the best LOC products I have seen is the ING Direct LOC, this product comes with a NIVA Card (NIVA stands for Nil Interest Visa Card) the NIVA will allow you to make purchases and even draw cash out of the ATM without paying interest on the credit card for up to 55 days or more commonly the credit card is swept monthly from the LOC so interest only for 30 days.
The structure is normally that you put all your pay into the LOC account and live off the NVIA card, as your pay is still in your account this will offset against the amount of interest your are paying (as per the above example $10 with $1 extra in the account, interest is only paid $9) along with that you are not paying interest on your living expenses and bills.
Adelaide and Bendigo Bank also offer this product, can you even do a combo loan With a LOC and if required a 100% offset split (one rate for LOC and cheaper rate for the 100% Offset).
Prior to leaving St George and incurring a discharge fee and new setup cost I would speak to a Branch Manageror at St George or your Mortgage Broker about the feature of your LOC if you still believe that this is not the product for you I would see if they would allow you to do a produce variation (this is just changing product) this is normally just a once off fee. Always check your exit cost, new loan setup cost and mortgage insurance cost (if applicable) on the new loan prior to making any change.

I think LOCs would be great if it wasn't for the tax issues. I would recomend people NOT use them for the main loan because of this. Only for accessing equity.