Hi all,
what are the pros & cons for L.O.C. vs Basic variable with offset for PPOR ?
We currently use a LOC with splits for private and investment portions. Its handy to draw down deposits for investments from an LOC. One advantage for loan with offset would be the lower interest rate.
We are thinking of moving to a new PPOR (upsize the land content/suburb and down size the house content (currently 4 bdrms, down to 3) and add value) and this is an opportunity to get the loan setup properly.Why are we moving – because our current PPOR is complete and we can’t add any more value and with a flat market, my goal to make capital gains each year needs quenching.
We have 2 CF-ve properties, and further investment purchases are on hold for 12 months or so during the lull. All 3 properties have stand-alone loans.
LOC Advantages
– Loan is perpetual (but the average loan life is less than 4 years so who cares)
– Interest can be capitalised (but the capitalisaed interest is not deductible so who cares)LOC Disadvantages
– Higher interest rate
– Higher ongoing fees and charges
– Repayments must go into the actual loanOffset Advantages
– Lower interest rate
– Lower ongoing fees and charges
– Only interest repayments go into the loan if interest only
– Offset account can work as a fully transactional bank accountOffset Disadvantages
– Not perpetual (who cares – see above)
– Interest repayments must be madeAs you can see, I am not a fan of using a LOC when there is non-deductible debt in the loan portfolio.
A huge benefit of the interest only loan with offset account structure on your PPOR is that when you move PPOR, you just take the cash out of the offset account and the whole loan is deductible because you never actually made any principal repayments.
I would also talk to an accountant about buying your PPOR in a company or trust name so all your debt is deductible.
Let me know if you need further info.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThere is at least one lender where the LOC rate is reasonable – ANZ. It is the same rate as the variable loan with the offset account.
Terryw
Discover Home Loans
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
Terry, why do you persist????
That is one out of how many???
Also, the loan amount needs to be at a certain level before you get the same rate AND there is still an annual fee for the LOC. It still costs more!!!
Also, you keep forgetting about the issue of deductibility if using a LOC for non-deductible debt!
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksOriginally posted by The Mortgage Adviser:As you can see, I am not a fan of using a LOC when there is non-deductible debt in the loan portfolio.
Even with LOC splits?
Would the offset be setup with the personal portion, and the deductible portion have no offset?
Where would you draw from to pay deductible expenses?I think I need a basic lesson here or a paradigm shift. I’ve always had a LOC but looking for a cost effective alternative.
TerryW, you use the term “reasonable” – does this indicate you aren’t a fan of LOC’s either?
Even with LOC splits I am not a fan. The only time I recommend using a LOC is when it is for a business selling goods and services who uses it for purchasing etc. Even then it is a big IF.
The offset would be set up on the non-deductible portion. You do not need one on the deductible portion as only the interest payments will go to that loan and they will come from the offset account.
If you need to draw for deductible expenses, you have an extra split setup as an interest only loan with free redraw. This is easy to do. If you find it easier using a LOC, then have a small one for this purpose but it will cost you more. The idea is to keep deductible loans and non-deductible loans at their maximum while also maximising deductions but also keeping repayments as low as possible.
Terry loves LOCs. We have an ongoing debate about which is better.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksI think Rob misunderstands my position.
I am a fan of LOCs, but am also a fan of offsets. I think they both work well and I use both myself.
LOCs are good if you want to ‘borrow’ money to pay investment expenses.
Offsets are good if you have spare cash and want to store that for later use while saving interest.
I wouldn’t advocate using a LOC if you are going to have your wages, rents etc paid into the account. Better to use the offset. I like LOCs to be used on unused equity.
With ANZ, the LOC does have a yearly charge, but if you are on hte professional package, it would be the same rate at the term loan with only the package fee.
Terryw
Discover Home Loans
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
And what about if the loan aggregate is not greater than $500,000 or the LOC portion is a poultry $50,000? What happens to the cost of the LOC then?
And as you answer, please remember that this is probably the cheapest LOC available.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksIn that case, it would be better to go for a term loan. There is no real point in getting a LOC if the rate is higher than a term loan.
Terryw
Discover Home Loans
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
Hi Guys,
As you are discussing the merits of loc v offset for ppor, I am hoping to pick your (Terry and Mortgage Adviser and any other finance guys..) brains on a similar matter.
I have an IP loan, a seperate IP to settle in Sept and rent where I live. I have spoken to Wizard (my ip loan) about setting up an offset account for the ip loan. I have some savings in a seperate bank account which I am told could be better used in an offset. This lump deposit could reduce my ip payments and still be accessed. Wizard told me this could be set up via a redraw facility.
Is this redraw a better way to go for the IP as it would reduce payments each month and still be accessible rather than having lump savings sitting in another bank account?? Any other advantaged / disadvantages of this??
Thank you in advance guys
Danny
No. Watchout, that could be bad advice. Wizard obviously do not have an offset account.
Once you pay money off a loan it is considered a repayment. Any withdraw of funds is considered new borrowings (by the ATO). So if you take money out for personal purposes the interest will not be deductible. If you used an offset, the interet on the loan would rise again when you make the withdrawal and this would be deductible as you have not taken any money from this loan account.
Terryw
Discover Home Loans
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
OK Thanks Terry.
Hypothetically, if Wizard did have an offset, then it would be a good move? (Maybe I will wait til next ip settlement in Sept and set one up then with different bank?)
Regards
DannyMy understanding now is:
LOC are good for IP loan deposits & IP expenses secured against PPOR &/or Loan with offset on PPOR in case coverted to IP later.
Loans on IP’s absolute basic no frills lowest cost I/O. (except honeymoons)Can a loan on PPOR be LOC with a split with an offset attached?
Hi Mitm,
No need for an LOC secured against a PPR, when a split loan with IO repayments will provide the same result and is usually more economical,
As already mentioned an offset linked to the non-deductible portion of the split loan will give you the flexibility to pay down or preserve the debt,
And for those who still prefer to use an LOC, the above scenario would still be applicable if One portion of the split was an LOC, 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.
Hi Danny.
I would certainly not be using redraw on an IP unless I knew every cent of the excess funds would only be used for investment purposes. Regaring redraw, you also need to watch out for redraw fees. These are usually in the vicinity of $30 – $50 each redraw with those lenders who charge.
In my opinion, there is really no need to use a LOC at any time. I can’t think of a single LOC facility that does not charge an annual fee or ongoing monthly fees. Why throw money away when you don’t need to???
The structuring with offset accounts does sound complicated but it is very easy through a mortgage adviser / broker to set it all up and a breeze to maintain. Everything can be automated and accessing funds is a simple matter of making a withdrawal or transferring funds via online banking.
If anyone can think of a time to use a LOC where it is more advantageous than a standard loan, please let me know.
A final point… many LOCs are also subject to annual review. This can become even more costly.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksOriginally posted by Mobile Mortgage:As already mentioned an offset linked to the non-deductible portion of the split loan will give you the flexibility to pay down or preserve the debt,
And for those who still prefer to use an LOC, the above scenario would still be applicable if One portion of the split was an LOCOK, I think I get it.
The ideal PPOR loan is primarily an I/O loan with offset, to preserve (or pay down) non-deductible debt. And an LOC split to access equity for IP deposits and business expenses (in other words – a business overdraft).
When PPOR equity increases, the LOC portion can be increased for further IP deposits.Would the best setup be from a retail bank, so the offset could be used as an everyday transaction &/or business account, perhaps with chequebook and credit card facilities etc ?
I have a dis-similar setup to above with ING (1x LOC + 1x P&I – total 2 loans) and BoQld (transaction account), but find the transfer delay requires careful planning and costs a bit in fees.
I am considering making PPOR an IP, and upgrading to another PPOR. I’d like to get the setup right.
PS When is the BAD tax going to be abolished.
To The Mortgage Advisor or other informed contributors:
Originally posted by The Mortgage Adviser:I would also talk to an accountant about buying your PPOR in a company or trust name so all your debt is deductible.
Let me know if you need further info.
Can you give me a brief overview.
My impression was that the Fed Govt was going to stop this and so I never researched the idea.
Now I’ve got 2x IP’s and am considering making my PPOR an IP, the above sounds like making life a whole lot easier barr the paperwork.Hi Mitm,
I think you’ve got it, However I prefer an interest only loan to an LOC,
The transaction account could be transferred across & linked to the new PPR loan when the time arises, 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.
Having your PPOR in a trust or company is a much more sophisticated approach and there are ramifications such as loss of CGT exemption.
Make sure you get very sound advice before tackling this step. I don’t mean to be negative – just counselling being informed.
Cheers,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
As Steve says, preference is for the interest only loans and NO LOCs. There is no need for them.
Also, staying with the majors usually provides the most flexibility when considering the fully transactional offset account as they have a lot of branches.
mitm, regarding an overview, it is pretty simple. Your company or trust buys the property, you ‘rent’ it, your company or trust pays the loan off. You do lose CGT benefits so you should speak with an Accountant first to see if this suits you.
Regarding Government abolishing something that is legal, I have never known them to act retrospectively so the biggest concern would be losing your CGT benefits.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential Links
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