Equity release, Offset or Line of Credit?

No I mean like this:

I have a 500K property, with 400K existing loan.
Over time the property value increased and a valuation report produced by bank indicated the value of the property is now say 600K
so in theory, at 80% LVR, I can take another 80K (600*80%=480. 480-400=80)

But rather than “topping up” the existing home loan from 400 to 480, the loan is restructured so it becomes 2 loans:

first loan is still the existing loan with 400K
Second loan is the equity released loan with 80K, and borrow it as IO + 100% offset

I then park the whole 80k into the second loan, making it produce 0 interest (meaning 0 repayment as well since it is IO), while at the same time I continue to pay the 400K repayment as usual.

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So question is whether this method is more preferred over “line of credit” method?

Yes, I am fully aware that the loan goes up, but I don’t want to “top up my existing loan”.

So suppose currently my accounts look like this:

Account 1: 400K loan
Account 2: Offset for 400K

After the equity is released, based on my own studying, I see that there is a choice of the following (there could be more choices but so far I see there are those 3):

Choice 1: Line of Credit, so my accounts look like this:

Account 1: 400K loan
Account 2: Offset for 400K
Account 3: My Line of Credit of 80K

Choice 2: top up existing loan so my accounts will look like this:
Account 1: 480K loan
Account 2: Offset for 480K

Choice 3: restructure the loan so my accounts look like this:
Account 1: 400K loan
Account 2: Offset for the 400K
Account 3: 80K loan
Account 4: Offset for the 80K

Between Choice 2 and 3, I would rather avoid Choice 2 if I can.

The reason is because:

1. the 80K is to be used as a cash deposit for the next investment and I don’t want to pay interest for that 80K unless that 80K is actually being used. This is why I park that 80K into Account #4 above so that 80K loan generates 0 interest until I use that money.

2. Of course I get what you are saying, just top it up to a single 480K loan and park that 80k into the offset of the 480K loan (which is essentially choice 2). But problem with that is, how do I know how much interest is charged for my 400K loan for that IP and how much interest is charged for that 80K that is used for the next investment? It becomes an accounting nightmare. So separating them out is much easier to manage from that accounting and taxing perspective.

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So regardless of whether you agree with this or not, my initial question is very simple:

Is it better to take that 80K out as a line of credit — Choice 1
Or is it better to take that 80K out as a separate loan? — Choice 3

What is really the difference between Choice 1 or 3?

• This reply was modified 6 years, 5 months ago by  Steven.

Hi Terry

Understand where you are coming from. My concern however is I don’t know when the invest will happen.

For example:

I want to buy a new investment property and I really don’t know when I will find the right one. I might not find the right one for a while or I might purely by chance stumble across one that I really like, and when I do find one, I want to have the deposit ready rather than having to “wait for the deposit to be approved”.

So with the interest only + offset strategy, the scenario come to my mind is like this:

1. Suppose I take out 80K equity release as a separate loan, interest only + offset, and then I park the 80K into the offset, so it is not generating any interest what so ever.

2. I am not able to find a property that I think is worth investing until March, meaning I incur 0 interest for 2 months. It also means I make 0 repayment for 2 months because this is an Interest Only loan and I am not paying any Principle (not until IO period is over anyway)

3. During March, I found the right property and I spend that 80K to invest in that property, and bank start charging me interest since I used that 80K, and the interest starting from March becomes tax deducible

4. Meaning starting from March, I can write the interest for that 80K off as cost against my profit.

5. So yes, there are 2 months when I am not being charged any interest as I didn’t make use of that 80K, but I am also not making any repayment either, so there is nothing for me to lose during that 2 months.. but starting from March on wards, interest charged due to those 80K being spent on investment becomes tax deductible (unless I got this totally wrong and that interest from March on wards is not tax deducible?).

I didn’t borrow any money yet, I am just asking and trying to understand the different options here.

I apologize if I sound like I am asking stupid questions, but it is something I have never done before and I am trying to understand based on the information I read.

In the example I gave, that 80K I put in offset are borrowed money. As in, it is the equity my lender released for me, so I did after all, borrow that 80K from a lender.

So unless I got my understanding totally wrong, otherwise I would say that 80K is borrowed money, but temporally put into an offset account (different offset account from the offset account that is used for offset the original 400K loan).

Like this:

Account 1: 400K loan
Account 2: Offset for the 400K <— This is were I put extra money to offset the interest for my original 400K loan
Account 3: 80K loan
Account 4: Offset for the 80K <– This offset account is created specifically for that 80K loan, it is an independent offset account than the one used to offset my original 400K loan, and I put the borrowed 80K into this account temporally until I use it

Hi Jaxon

In that case, are you able to advise how do I keep track of which invest against the combined total of the interest is being charged?

Say, the original 400K gets charged 2000 per month Interest (Interest Only)
Once I use that 80K, the interest becomes 2500 per month. (Interest Only)

The numbers are not accurate, but for illustration purpose only.

In this case, it might be easy to for me or for you to say say 2000 interest against original investment and 500 interest against new investment, but let’s throw in another variable here…

What happens if the original 400K loan is for my Principle Home (PPOR) that is being repayed P&I rather than IO, and I am using equity of my PPOR to invest in a new IP?

In this case, the interest for that original 400K loan would vary every month (due to I am paying Principle too), this means the monthly repayment for that single 480K is different every month.

So if I just “top it up” and make that a 480K single account, then how do I tell how much of the combined total interest is for my PPOR (therefore NOT tax deducible) and how much of that combined total interest is for my new IP (which is tax deducible)? The calculation becomes a nightmare in this case…

Terryw wrote:

May not be a good idea to have just one loan as it would then be a mixed purpose loan which can create tax issues, especially if one purpose is not deductible.

Yea.. that’s exactly what I was trying to say all along

A single loan with multiple purposes, it gets messy.