All Topics / Finance / Line of Credit VS Offset account

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  • Profile photo of GeorgeGeorge
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    @mw2
    Join Date: 2015
    Post Count: 6

    Hi folks.

    Very keen to hear from other’s experience on what worked well or not so well in terms of their loan structuring.

    I’m interested to know if the line of credit’s advantages have been made obsolete by the availability of an offset account.

    Back in the late 90’s, I know that LOC was all the rage.
    So, just wondering if in today’s context, which method is more suitable in terms of building a investment property portfolio with or without an unencumbered PPOR?

    Love to hear your examples on your loan structuring.
    Mortgage brokers feels free to add your two cents.

    Thank you very much.

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

    The Loc is a totally different loan product to a loan with an offset.

    They are not the same and should be used in different circumstances.

    Most investors would need to use both produxts at the same time.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    As Terry says.

    IMO i don’t see the needs to be paying a premium rate for a LOC product when an IO loan with redraw does exactly the same thing.

    Certainly horses for course but a mix of both seems to suit most.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Corey BattCorey Batt
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    @cjaysa
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    Agreed Richard – an appropriately setup structure will not need to use a LOC these days, there are some minor times when they can be of use, but for the most part are a relic which has fallen to the way side compared to a 30 year term loan, interest only with fully transctional offset attached.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of TerrywTerryw
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    @terryw
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    I agree Richard, but it depends on the bank. If you can pay directly from the loan account you would be better off avoiding the LOC option. If you cannot then you run the risk of losing deductibility of interest by borrowing and parking into a savings account and then paying out.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Agree Terry certainly would not suggest anyone ever withdrew the funds and placed them in a savings account.

    So important for investors need professional advice.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    I don’t usually set up LOC’s for clients these days. Agree with the others above – when a variable IO loan can provide the same function albeit at a lower cost….it doesn’t make a whole lot of sense to get up LOCs

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Colin RiceColin Rice
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    @fms
    Join Date: 2011
    Post Count: 338

    LOC can be wound back at banks discretion so you could have an LOC of 300k and wake up the next day and its 150k. Unlikely but happened during the last GFC. People where locked out of redraw as well. Can you imagine if you needed those funds for a pending settlement and all of a sudden they are not available!

    They are a clean and neat way of doing things from a loan contamination perspective so still have a part to play.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of TerrywTerryw
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    @terryw
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    My strategy with Accessing equity is to use a io loan if it can used toboay directly from the loan account. But if it cant then use a Loc and once drawn convert it to a io loan.

    This is more work but avoids the tax risks.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of JonJon
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    @wealthyjvd
    Join Date: 2008
    Post Count: 175

    Hi all,

    What are the advantages/disadvantages of using a LOC which is secured against an O/OCC property to put a deposit on a development site + drawing on the LOC as funds to contribute to the construction? I.e., deposit for land + build from LOC and remaining funds to complete from the loan which is secured by the development site (no cross-collateralization).

    Do you see any major issues with this?
    What would be the difference in doing this as opposed to drawing from an offset account against an O/OCC IO loan…

    Thanks,
    J

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

    Major advantage is deductibility of interest from a LOC
    money from an offset would not be deductible.

    Disadantage of a LOC is that it is at call, not good for a developer, so once it is drawn convert it to a IO loan.

    If you can use a IO that can be redrawn and paid directly from the loan account then this would be even better.

    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 FintrackFintrack
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    @fintrack
    Join Date: 2013
    Post Count: 15

    I have heard stories of redraw being a problem that if it set up on an investment loan and the client redraws money for personal reasons.The ATO then deems the loan purpose to have changed and hence the loan interest becomes non-deductible. Something to definitely check out. I would like to know if anyone else had that problem?

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

    Hi Fintrack

    I think you have confused a few things. Loan purpose for the original portion stays the same, but it can get messy.

    If you redraw from an investment loan the interest on the loan doesn’t become non deductible.

    There are three ways it can end up
    1. You withdraw from an investment loan and use those funds for that investment property (which the original loan relates to). No problem here. All the interest would be deductible.
    2. You withdraw from an investment loan and use those funds for personal expenses – such as groceries, new boat etc. This loan would now be a mixed purpose loan with 2 purposes, one being an investment purpose relating to the original loan and the other being private purpose. The interest on the private purpose would not be deductible. You would need to work out the percentages and claim only the investment portion of the interest.
    3. You withdraw from an investment loan and use those funds for another property which is also an investment.
    Here you would have a mixed loan, but the whole of the interest would still be deductible. You may have issues later on when selling a property or issues now apportioning interest if the owners of each property are different (e.g. spouse on title to one but not the other).

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of FintrackFintrack
    Participant
    @fintrack
    Join Date: 2013
    Post Count: 15

    Have you got that in writing from the ATO because my client’s discussions with them does not concur with your conclusion.

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

    Yes I can back that up with authority.
    You could read the case of ‘Domjan’ for starters.

    Your clients should seek tax advise asap.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of FintrackFintrack
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    @fintrack
    Join Date: 2013
    Post Count: 15

    Just read some of the articles so basically as long as the client clearly identifies the transactions and maintains proof then they should be okay?

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

    I don’t understand what you mean.

    Example

    John has a loan of $80,000 secured by an investment property with plenty of equity. The loan relates to the purchase of that investment property.

    John now needs $20,000 for an urgent kidney transplant.

    John increases his loan to $100,000.
    Going forward 80% of the interest should be deductible.
    This is a mixed loan

    But just should not increase his loan like this. John should have set up a separate split of $20,000 and kept his $80,000 loan as is.
    This way John could pay down the $20,000 and keep the $80,000 as is. This would not be possible with the mixed loan because any repayment would also come off the $80k portion too.

    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 FintrackFintrack
    Participant
    @fintrack
    Join Date: 2013
    Post Count: 15

    I was referring to redraw on one split which had its original purpose as Investment, then the client redraws funds out for a personal use. Clearly separate splits for investment and personal loans are best but in this case the client mixed up the transactions in the one loan with no splits.

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

    In that case it would be similar to John in my example above

    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 JonJon
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    @wealthyjvd
    Join Date: 2008
    Post Count: 175

    Thanks guys.

    So providing the home (owner occ) is paid down to $0, the client uses this property as security and applies for a LOC for investment purposes then (in the example I gave), the total portion is tax deductible BUT if the home loan has not been paid down then it would be advisable to have two splits – standard loan for remaining portion of debt PLUS LOC for the development?

    All very helpful – thanks!

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