Offset or LOC Loan?

Hi Giddo,
I use 2 LOCs. 1 for investments and 1 for personal. Keeping them separate ensures you can claim a deduction on your investment interest and any audit by the tax office clearly shows there was no withdrawals from the investment LOC for personal use.

Over the years, for my situation, its best to keep separate accounts for personal and investment.

I try to keep my personal LOC next to $0 and I xfer any surplus cash I have in my personal LOC to my investment LOC there by increasing my equity in my investments for use on future investments.

LOCs vs Offset accounts? If you have a volatile balance (ie share trade or something) I think an LOC works well. Otherwise I think either work well. Note offsetting does not mean principal reduction, however LOC is a higher IR. I would do an analysis on both based on your saving behaviour to determine which will work best for you.

The above is just IMHO!

Mat

Hi Giddo,
A 100% offset is the way to go based on the info you have supplied,
You will also have the option of making the repayments based on the original loan amount regardless of the balance in the offset account, forget the LOC you don’t need it. Cheers.

Regards
Steven
Mortgage Broker

Mobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.au

PLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.

Hi Terry,

Can you elaborate on the potential tax implications of using a LOC? I’m using a LOC for my development project, so I’m very interested to any potential problems with this approach.

Thanks,
Donald Xie

I think LOC is good if you would like to build up your equity. And the fund is availbale at call. If used for an investment purpose, as long as the money or a lump sum in is purely to reduce the mortgage (nothing else), then the unused balance can be used to fund nother investment purchase. some products in the market will also allow you to split the unsused balance as a new account, taking care of a different investment (e.g. sub-account in St george Portfolio loan). So, the first pre-requisite of LOC, in an investment scenario, is any money in should be to reduce the mortgage amount only (not for parking purpose, like in off-setting scenario). Once an amount is taken out, it should be related to the original investment purpose (for constrution for instance), or another new investment scenario. Secondly, yes the user should have a good disipline in managing the unsused fund. Another benefit of LOC is the fund is at call. it will allow you to gain an upper hand sometimes when facing competition in a deal, whereby a speedy settelement is paramount in wining the game.

I hope it won’t sound confusing or complicated, otherwise stick with offsetting.

Cheers,

Thanks Terry. So if I understand correctly, the problem occurs when one use one LOC account for mixed investment and personal use. On the other hand, if all transactions are related to investment, it would not cause such problems and therefore it’s clearer for tax purpose.
<br><br>
In my case, the LOC is on my own house. I draw down the account to, say, pay deposit and other fees to my initial purchase, and deposit the unused amount such as overpayment of council rate allowance. I also intend to deposit GST refund into the same account. I was told (this is my first development project so I’m learning while I go) this is ok. Will those deposits be seen as repayment, i.e., regardless where the source of the deposit is?
<br><br>

So one is effectively claiming the LOSS of interest earned, rather than the interest charged to the borrowing? Is this just a difference in terminology, but is in fact treated the same for tax purpose?

Thanks,
Don

What happens if you upgrade your home and decide to keep the old one as an IP?

You may not plan to but I see people get into this mess a lot.

I would strongly advise one consider offset rather than LOC in almost all cases.

Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985

Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.