Forums / Getting Technical / Finance / Equity release, Offset or Line of Credit?

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  • Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,325

    Hi Steven,
    On page 1 of the “Big Picture” thread is a post about Offset Accounts. You can find that one here:-

    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973

    In the embedded link, there are several useful posts relating to Offsets and how to use them.

    Then, on page 2 of the “Big Picture” thread is a post about “GOTCHA’s” – it reads like this:-
    “The first GOTCHA is to do with my old mate, the OFFSET ACCOUNT. But, it could be about any other Account too – so do read it, even if you don’t have an Offset – and relate the thoughts to your account (savings, redraw, whatever).

    “The first GOTCHA relates to how Mixed Loans can be created by not thinking about HOW to refinance. Or by withdrawing both deductible and non-deductible amounts from any existing account. Once a MIXED LOAN is created, it becomes more and more messy – so better to NOT make it messy in the first place.

    Go to the link below to read more where @terryw shares some extra REALLY useful and important information:-
    https://www.propertyinvesting.com/topic/4997918-redraw-from-an-offset/#post-5029521

    ———————————————————–

    Steven, I hope the above words and links help to shine more light on the subject of Offset Accounts for you

    Benny.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    And I should point out the best solution and that is a term loan which allows payment directly from the loan account. Westpac Roket loans for example.

    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 StevenSteven
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    @steven1982
    Join Date: 2017
    Post Count: 155

    Hi Benny

    Thanks for the information in this regard.

    Truth be told, I will never want to have a single loan with multiple purpose (I stated this quite clearly). So now it comes down to whether or not I want to have multiple offset accounts, each offset account linked to a different loan, and those offset are independent of each other.

    Seems Line of Credit option is less recommended under most circumstances (most people I talk to seem to favour Line of Credit less). There is one broker however, seems to think LOC is a better choice but when I questioned him as what are the difference between the 2, he avoids my question and just said something along the lines of “they all work the same”… So… that’s a sign for me to not consider using him…

    Profile photo of ThequalifiedbrokerThequalifiedbroker
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    @rhett1975
    Join Date: 2014
    Post Count: 2

    Hi,
    Not sure why your untrusting of the broker whose opinion is that a LOC would be appropriate, other than to say he didnt elaborate as to why he is suggesting it sufficiently for you, for mine this is problematic

    In virtually all circumstances nowadays as a broker and qualified non practising FP i suggest LOC. Here are some key reasons why

    1. Keeps your investment loans separated and easier to track for accounting purposes.
    2. You absolutely wont pay interest on the LOC until such time as you utilise the balance, ill elaborate as to why im saying this later on
    3. The alternate method of setting up a secondary loan is an issue from my perspective, and not only for the mixed purpose problem, but because its finite. Id much rather the LOC as the limit can be more readily increased as time goes by as opposed to releasing constantly for further investment (meaning i have to reapply in full each and every time im looking to release equity, yes you can say the same of the LOC to a degree, however by increasing a LOC you only have the one account not 2 3 4 5 6 as time goes by and your reaching back into the initial property to fund further purchases).

    Point 2 i make because different banks have different ways of operating accounts. Even if you have a io loan with the full balance offset, you can be forced into making payment, odd i know, however i have seen it.

    The biggest reason however is the changing landscape of the marketplace induced by regulatory change. You will be aware (if your not you should be) that banks have had imposed on them 2 significant brakes in terms of investment lending via our regulators.

    1. No more than 10% of all new business they write can be for investment purposes.
    2. No more than 30% of ALL loans they write can be on an interest only basis.

    The 30% rule i actually see as a bigger problem, because it could make 80-90% of the property most investors buy significantly less attractive. Why because most people buy negatively geared property and should they lose the ability to gain an interest only loan it would make it much more difficult to buy and hold. Now, virtually all banks will at some point push to these limits and have already for point 1, a matter of time for point 2.
    The way they have responded has been to either decrease max LVR or by increasing price, or a combo of both, simply put, releasing equity is going to become more and more difficult and costly, particularly once the bigger banks start pushing the 30%. The way to avoid this is to take a product from the bank that inherently has the exact characteristics you desire. Some would argue yes thats a solution but a more costly solution (rate), to that i say the IO rates are already high and likely to continue rising, however, if that bothers you considering where the rates are at the moment, then perhaps investing is not for you. The interest rate you pay on an investment loan in my opinion is somewhat irrelevant, as long as its market competitive, of far more concern is the right asset in the right market at an appropriate time for you personally.

    Basically, LOC is the way id set it up for all the reasons above.

    Cheers

    Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
    Post Count: 155

    Not sure why your untrusting of the broker whose opinion is that a LOC would be appropriate, other than to say he didnt elaborate as to why he is suggesting it sufficiently for you, for mine this is problematic

    I don’t actually mind people suggesting LOC is a more preferred solution.

    But what I have a very big problem with is when being asked to compare different products, that particular broker is un-willing to explain the difference, unwilling to provide the pros and cons of both options and the rationals behind why he thinks LOC is the better solution.

    This kind of behaviour gives me the impression that he was trying to hide something.

    If he explained the situation like you did, I’d be much more trusting to him.

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