Forums / Getting Technical / Finance / Using line of credit to access fixed mortgage equity

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  • Profile photo of WoodlinWoodlin
    Participant
    @woodlin
    Join Date: 2016
    Post Count: 2

    Hi folks,

    This is my first time posting here, and although I’ve spent a little over a week going over the forums, I know I haven’t seen everything, so apologies if the question has been asked and answered elsewhere.

    I’m new to property investing, and with my partner am in my own home, which we’ve had for 2 years. We’ve recently redone the home loan, taking advantage of a fixed interest rate of 3.99% for 5 years. In the process, we were advised we have approximately 150,000 equity in our home (we bought under market, and the area has really boomed).

    We have an offset account with the mortgage, and were brainstorming how to access the equity to fund investment property deposits. Given its fixed for 5 years (groan, rookie mistake… moving on…) we believe the best way to access is setting up a personal line of credit against the equity, but have no experience of doing this – can anyone offer some insight into how it works? Can we take out a line of credit with a different financial institution to that of our home loan?

    My partner, being a creative type, also suggested we could take out the line of credit and put the money straight into the offset account while we’re scouting out properties to buy. The line of credit interest rate we’ve found is 3.39%, so we’d essentially be reducing our home loan principal by using the line of credit. We will be talking with financial advisors asap, but if anyone else has done this, or considered it, I’d be grateful to hear your experiences! Similarly, if one of the more experience mentors has opinions on this, I’d be grateful for your input!

    I’m also sharing in case anyone else is in a similar position – because if this works, we’ve got a honey pot for deposits!

    As an aside, we’re looking at a family trust ownership structure, as we have extended family members interested in combining forces with us for everyone’s benefit. Our family members do seasonal/fluctuating work, so the flexibility to divide benefits for tax minimisation is appealing, and none of us are really interested in negative gearing.

    Look forward to hearing your thoughts!

    All the best,

    Woodlin

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Hi Woodlin

    Welcome to the forum and I hope you enjoy your time with us.

    Firstly there is a big difference between equity and accessible equity so for the purposes of this response we will assume the figure of 150K is accessible equity.

    Regretfully in the main you will only be able to set up a Line of credit or equity loan with the same lender who has your first mortgage.

    Secondly by drawing down on the equity and placing the funds in your personal offset account you will contaminate the interest deductibility and therefore even if you eventually use the funds to fund future deposits will find you are unable to claim it as a Tax deduction.

    As far as establishing a Discretionary Family Trust this may help you distribute some income to beneficiaries in a lower Tax bracket but remember the property acquisition has to make money in the first place. A lot of properties at present are not positively geared straight off the bat so this won’t help you. Of course good legal advice needs to be sought before going down this path.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    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
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Woodlin

    Welcome aboard :-)

    How are you calculating the equity that you have available?

    Generally speaking – when accessing equity we set up a second loan account with redraw. The surplus funds are then dropped into that redraw account at settlement to be used to cover the deposit/costs on your future IP. The benefit of this approach is that interest won’t be payable until you actually spend the money.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    You will need some legal advice on the trust issues – sounds like it will be messy with multiple people being invovled. How will you pass on trust owned property on death on one or more of the people.

    You will also need some tax advice on the loan structure. Borrowing and parking in the offset wil create another mess and the loan interest won’t be deductible – even if it is eventually used to invest.

    Don’t make more rookie mistakes.

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

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

    Profile photo of Anthony ZanattaAnthony Zanatta
    Participant
    @azanatta91
    Join Date: 2016
    Post Count: 25

    You will also need some tax advice on the loan structure. Borrowing and parking in the offset wil create another mess and the loan interest won’t be deductible – even if it is eventually used to invest.

    Hey Terry, slight sidetrack here (sorry OP) but you’ve piqued my interest (no pun intended), would parking sleep at night funds (savings) in an offset account also result in loan interest not being tax deductible???

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    You will also need some tax advice on the loan structure. Borrowing and parking in the offset wil create another mess and the loan interest won’t be deductible – even if it is eventually used to invest.

    Hey Terry, slight sidetrack here (sorry OP) but you’ve piqued my interest (no pun intended), would parking sleep at night funds (savings) in an offset account also result in loan interest not being tax deductible???

    Nope that is fine.

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

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

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