Just wondering, how many people out there are using lines of credit for their ppor. Do you feel that that an LOC is working for you or do you feel like you are going backwards as you are finding it hard to control your finances?
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just as soon as i can build more equity in my ppor, i will be utilising a loc to finance the purchase of additional ip’s. a good friend of mine has done this with great success. i’m not sure though if having a loc is for everyone. i imagine it would be pretty easy to get into strife if you’re the type to spend cash on consumer items etc. a loc is a convenient way to have the cash to buy ip’s.
I use a LOC on my PPOR. But I do not deposit incomes etc in there. I use it merely for investment expenses and deposits.
Terryw
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Hi Terry.
If your I/P’s were slightly negatively geared, would you just deposit the shortfall from your personal account into your I/P l.o.c or would you wait for a tax refund and deposit that into your l.o.c?
Just curious.Thanx
Originally posted by Terryw:I use a LOC on my PPOR. But I do not deposit incomes etc in there. I use it merely for investment expenses and deposits.
Terryw
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[email protected]Mine are all positive geared, except for a land loan. What I do is pay everything from a 100% offset account linked to another IP. I put all rent and income into that account. And I pay interest on the LOC which was used for deposits from this account.
Terryw
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I still see no reason why anyone would use a LOC in any situation other than as a loan for a business they are operating.
The benefits of a home loan with an offset account far outweighs any benefits attributable to a LOC.
Robert Bou-Hamdan
Mortgage AdviserA LOC is easy to use and works well. Especially for investments.
If I had a home loan with an offset account, and funds withdrawn from the offset would cause interest payments to rise, and the extra interest incurred would not be deductible.
Terryw
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[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Hey Rob.
Whats the difference between a reducing LOC and a Loan with a offset account?
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Terry, I think you have missed the concepts of ‘purpose of funds’ and how to ‘effectively’ use an offset account. Money withdrawn from a Line Of Credit would also cause interest payments to rise. Assuming the money already owing was not deductible in the first place on both loans, this would cause all sorts of accounting difficulties. In any case, depositing the funds into the loan account before using it for an investment purpose would remedy your problem of deductibility.
Keeping deductible and non-deductible debt seperate is always the best way to go. Splitting is a very simple and cheap procedure.
Kerri, in response to your question, I have put together a three page outline in Word format regarding what I think about a Loan with Offset Account as opposed to a Line Of Credit. Click on the link below to view it…
Line of Credit v Loan with Offset Account
Email me if you need more information or if you disagree with anything I have written.
Robert Bou-Hamdan
Mortgage AdviserWell done on the Offset Vs LOC article Rob,
I have long been an advocate of a 100% offset over a LOC, I agree there are times where an LOC has its place in certain situations, however in the majority of cases an offset is a much better option for the reasons you have outlined.I think part of the reason why so many investors head straight for an LOC over an offset is due to a lack of understanding of how an offset works and the benefits it has to offer, Cheers.
Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hello Robert
I am not sure what you are trying to say here.
What I said is correct.
If you have money in an offset account and withdraw that money, the extra interest incurred on the loan would only be deductible if the loan was already for investment or business. There would be no accounting problems as the loans/accounts are totally separate.
If you are using a LOC as a home loan, then withdrawing funds for a mixture of personal and business use could make things messy
Terryw
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[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Originally posted by Terryw:If you have money in an offset account and withdraw that money, the extra interest incurred on the loan would only be deductible if the loan was already for investment or business. There would be no accounting problems as the loans/accounts are totally separate.
I was trying to point out that if you wanted to use funds for a deductible purchase or investment from an offset account linked to a non-deductible loan account, simply transferring the money from the offset account to the loan account and then redrawing these funds would make the interest expense on the investment portion deductible and still keep your non-deductible debt at the lower level. It has absolutely nothing to do with what the loan was setup for because it is the purpose of the funds at any point in time that determines deductibility.
If you are using a LOC as a home loan, then withdrawing funds for a mixture of personal and business use could make things messyThis applies to both a LOC and Offset Account facility and is why I advise against a LOC as it is much easier to mess things up with a LOC in my opinion.
The reason I would use the Offset Account facility in the example you are providing (where a non-deductible debt makes up the major portion of the loan account) is because it is fairly simple to deposit funds from the Offset Account into the Loan Account and then split this portion into a seperate interest only loan leaving the non-deductible debt at the lower level with a lower limit and the Offset Account still attached. It is tidy for accounting purposes.
Also, setting up your finances so ALL your income (including rental income) is deposited into the Offset Account and direct debits are set up to pay your deductible interest only repayments on the last possible day maximise the benefits of using this structure if a non-deductible debt exists. Other simple accounting methods also maximise the benifits (like claiming your deductions each week with your income).
Robert Bou-Hamdan
Mortgage AdviserHi RObert
Thanks for clarifying. In my case I have no non deductible debt, so you response confused me.
I generally prefer LOCs because of the ease of use and the fact that you can easily capitalise the interest. But these do usually have a higher interest rate (ANZ is one that doesn’t).
Some lenders don’t have a 100% offset, but offer free redraw (eg Macquarie LOC – the MSE) so you could draw down the funds at settlement, put them straight back in and then use it like an LOC.
Westpac has a really good product called the Rocket Repay which has both a LOC and a 100% offset available, but it is just too expensive.
So there are some good LOC type products out there if needed.
Terryw
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I do not understand why anyone would capitalise interest. It serves absolutely no benefit unless you can not afford to pay your loan. Can you please explain why you like capitalising interest?
Regarding the ANZ LOC, this is the only LOC I am aware of that offers a comparable rate to a standard loan. Having said that, they do not generally offer the higher discounts on their LOC.
I like the unlimited free redraw accounts to use as an all-in-one interest only facility on investment loans. It provides some flexibility later when all non-deductible debt is gone without the need to refinance or make other changes.
Robert Bou-Hamdan
Mortgage AdviserRob
Capitalising interest can help you pay off a home loan faster! Despite what you may think, if done properly interest is claimable.
There may also be times when people have no choice but to skip a payment, so it can come in handy.
And what about this scenario:
A person has a home loan with an offset and a LOC securred against the home loan. They want to pay rates of $1000. They could get the money from their offset account, but the interest would go up on their home loan. If they took the money from the LOC, they could claim the interest on this portion and their home loan would still have the lower interest from keeping their money in their offset account.Terryw
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[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Rob I just read your article and agree that often offset accounts are better.
But in one of your examples, you had the clients drawing down a loan at settlement and then putting the money in the offset account. The net interest bill will be initially nil, as they are balance. But if money is taken out for say a deposit on an investment proeprty, this is where things could go wrong.
The interest on the loan would start being payable, as the offset account has reduced, but this interest may not be claimable. The reason is, the money was not borrowed, it was taken from a savings account. By putting it into the savings account, the direct link between borrowing and investing is not there.
The ATO has recently disallowed the claiming of interest in a similar case. They appealed to the AAT, and lost from memory.
A better option would be for them to draw down the loan fully, and immediately put the money back onto the loan (making sure it had redraw. This way they could still draw money out, which would be borrowings, and the interest could be deducted (if used for business/investment).
Many banks charge a small fee for redraws, but this would be minor when compared to the interest being saved in this loans compared to a higher rate LOC.
Terryw
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[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Originally posted by Terryw:Rob
Capitalising interest can help you pay off a home loan faster! Despite what you may think, if done properly interest is claimable.
Of course it will help you pay off a home loan faster but it will also take you much longer to pay off your investment loan and also reduce the return on your investment as more interest capitalises. This is an exponentially growing non-deductible expense that destroys any benefit obtained from paying your home off sooner.
It doesn’t matter what I think but is more what I know which is supported by the Court and the ATO. Capitalising interest can not be deducted LEGALLY regardless how you do it!!!
There may also be times when people have no choice but to skip a payment, so it can come in handy.This would be one of the only times they come in useful but I would not plan my borrowings around not being able to afford the repayments.
And what about this scenario:
A person has a home loan with an offset and a LOC securred against the home loan. They want to pay rates of $1000. They could get the money from their offset account, but the interest would go up on their home loan. If they took the money from the LOC, they could claim the interest on this portion and their home loan would still have the lower interest from keeping their money in their offset account.Before I address this scenario, can you please tell my why you think paying rates from a Line Of Credit would make them deductible if they relate to the family home?
If you are referring to rates on an investment property, then why could they not pay the rates from the loan on their investment property? If they have no room to move on the investment property because the LVR is too high, then your scenario may be appropriate but I would have a split loan with redraw instead of the LOC in place for these sort of expenses. This assumes a non-deductible debt still exists against the family home.
Robert Bou-Hamdan
Mortgage AdviserOriginally posted by Terryw:But in one of your examples, you had the clients drawing down a loan at settlement and then putting the money in the offset account. The net interest bill will be initially nil, as they are balance. But if money is taken out for say a deposit on an investment proeprty, this is where things could go wrong.
The interest on the loan would start being payable, as the offset account has reduced, but this interest may not be claimable. The reason is, the money was not borrowed, it was taken from a savings account. By putting it into the savings account, the direct link between borrowing and investing is not there.
The money was borrowed for investment purposes. It does not need to be used immediately. Once an interest expense begins to accrue, it is immediately deductible. The money is merely being parked in the transaction account. There is no issue with deductibility in my example.
The ATO has recently disallowed the claiming of interest in a similar case. They appealed to the AAT, and lost from memory.I think you will find this case relates to something totally different if it exists. Please let me know the case name if you find it. I will search the AAT for deductible interest cases to try and find it myself in the mean time.
A better option would be for them to draw down the loan fully, and immediately put the money back onto the loan (making sure it had redraw. This way they could still draw money out, which would be borrowings, and the interest could be deducted (if used for business/investment).There is no need to do this.
Many banks charge a small fee for redraws, but this would be minor when compared to the interest being saved in this loans compared to a higher rate LOC.Many banks also have free redraw.
Robert Bou-Hamdan
Mortgage AdviserThe Hart’s case only referred to a specific situation. There are still many people in property and business who capitalise interest legally. If you do this, your tax deductions rise, while you non deductible debts decrease faster, saving money.
My example with the rates was referring to rates on an investment property. Of course, if their loan had a redraw facility they could pay the rates from their home loan with the interest being deductible. It would be ideal if the redraw was free and they had a split loan to keep the accounts separate for tax purposes.
Terryw
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Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I think we were talking about capitalising interest on an investment property. This is not legal. Do you have an example of when it is legal because that would be valuable information?
Robert Bou-Hamdan
Mortgage Adviser
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