Forums / Getting Technical / Finance / Purchasing a house with a line of credit

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  • Profile photo of diceman99diceman99
    Participant
    @diceman99
    Join Date: 2005
    Post Count: 9

    Hello,

    I currently have a Line of Credit (LOC) over my PPR the interest rate on this is approx 5.5%
    Could I quickly purchase an investment property using monies in my LOC at 5.5% then at a later date get a traditional loan at say 3.5% over the investment property. Then payout my LOC.

    So in effect rather than get a loan approval, I just use my LOC as a temporary borrowing facility.

    Thanks in advance.

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

    Yes and it could be done so as to maintain deductibility of interest

    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 BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Diceman,
    I can see the benefit of using the higher interest loan if it allows you to “settle quickly” in return for a nice discount on the purchase price. But if there is no immediate benefit for you, take the time needed to set up the better loan right off.

    As always, if not meeting them on price, give a bit on terms. Or, if meeting their terms, then don’t give in on price. Good luck,

    Benny

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

    There can be advantages in using a loc and not mortgaging the property being purchased. One is that when you subsequently do mortgage it and borrow against it the lender can lend based on value and not purchase price.
    E. G. Find a house valued at $100k and buy it for $80k using a loc secured against another property. 1 day after settlement apply for finance and borrow $100k X 80% = $80k. This works out to be 100% LVR based on purchase price.
    Good in theory but difficult in practice.

    The down sides are this would be treated as cash out borrowing and be much more restrictive than borrowing to buy the place.

    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 Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Be careful with this – many lenders are heavily restricting cashouts so you may draw the funds out and find then that you can only work with <10% of lenders as the others won’t allow you to draw the funds back out due to the latest round of restrictions.

    Best to speak with an investment focused broker who can determine whether you might cause any issue with this – it will largely depend on the details of your situation – I’ve got some clients who actively use this strategy in particular with very distressed/damaged property and then renovate/revalue and equity release.

    Aside from that – 5.5% for a LOC on your PPOR is extortionate, you could alternatively get that down to ~3.7x% odd with a restructure/refi which will be well ahead of what most investment loans. (you mention 3.5% for an investment loan, obviously an example but you’ll be stretched to get any reasonable product near that rate and most close will mean you’re making sacrifices which will limit your ability to borrow again in the future etc)

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

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

    (you mention 3.5% for an investment loan, obviously an example but you’ll be stretched to get any reasonable product near that rate and most close will mean you’re making sacrifices which will limit your ability to borrow again in the future etc)

    Realistically it will be circa 4.5% on an IP depending on the lender and loan structure.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

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