Hi all,
I am going to the our Bank on Saturday to apply for a LOC from the Equity from our PPOR. If say we have $300,000 equity then the bank will give us a LOC of 80% being $240,000 in a seperate account.
Question is
1. "If we drawn down $100,000 from the $240,000 to use as a deposit to buy our 1st IP, will there be Interest charges and payments required for the drawdown LOC as well as the payments required to pay the IP Loan?".
2. "Does the rent get paid into the Loan Account or LOC Account?".
3. "As there possibly will be a shorfall on rent versus payments required for a loan payment, does the shortfall come from the LOC?".
4. "Can our LOC account be used as an "Offset Account" for our PPOR loan account?".Thanks for your help, I have serched heaps of websites, read a few books, spoke to a few investers and they all have different and confusing opinions. Help is always needed for Newbies.
Thanks Again
Hi,
There will be others with broader mortgage working knowledge than me, but, I'll have a crack at giving you an answer…
1) Yes, there will be interest on the $100k drawdown (which you might be able to capitalise or else pay for out of the drawdown rather than paying cash). There will also be interest on the loan for the IP.
That is, I'm assuming you will use the drawdown on your PPOR to pay for the deposit on the investment property (IP) and have a separate loan (say 80%LVR) for the balance?
2) The rent will normally be paid to a rental manager (who will have a trust account), and you can direct them to pay it to whatever account you nominate (cheque account, loan account etc)
3) The shortfall can comes from the LOC, or from other means… but it must come from somewhere! Clearly, if there is a shortfall you are buying for growth, so do your sums carefully and test your assumptions thoroughly!
4) I'm not sure about this question as a LOC will usually be in debit (you owe the bank), whereas an offset account is usually in credit (the bank owes you). Perhaps someone with specific mortgage product knowledge could let us know is such a beast (that allows a debit LOC when the loan is drawndown, and a credit 100% offset when the account is in credit) exists…???…
Hope this has helped. Thanks for your post.
– Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
VK6TVA wrote:Hi all,
I am going to the our Bank on Saturday to apply for a LOC from the Equity from our PPOR. If say we have $300,000 equity then the bank will give us a LOC of 80% being $240,000 in a seperate account.
Question is
1. "If we drawn down $100,000 from the $240,000 to use as a deposit to buy our 1st IP, will there be Interest charges and payments required for the draw down LOC as well as the payments required to pay the IP Loan?".If you draw down you pay interest on the LOC balance drawn on.
You need to check if you have to pay interest on the LOC or have it capitalized (added to the LOC loan)
You need to check if capitalizing the interest is tax deductible with your accountant.
You need to check if it has to be paid back what term if any is required.
VK6TVA wrote:2. "Does the rent get paid into the Loan Account or LOC Account?".
Your choice. If you want to do question 3 then probably into Loan Account
VK6TVA wrote:3. "As there possibly will be a shorfall on rent versus payments required for a loan payment, does the shortfall come from the LOC?".
Probably you could take out say $2000 from LOC and pay it off the IP loan and total investment purpose interest would work out the same for Tax Purposes. Depends on payment conditions of LOC though. Or you could pay $2000 in cash off the IP loan to give you the breathing space on IP loan if rent is delayed.
VK6TVA wrote:4. "Can our LOC account be used as an "Offset Account" for our PPOR loan account?".
No. An LOC is a loan and an the offset account is a savings account.
If you meant can you borrow money from the LOC account and then sit it in an offset account to reduce your PPOR interest then it could be done however tax deductibility is eliminated .
The LOC interest would now be non tax deductible as you have used it for private use rather than for investment purposes and the interest charged to the LOC would negate the interest saved on the PPOR.
VK6TVA wrote:Thanks for your help, I have serched heaps of websites, read a few books, spoke to a few investers and they all have different and confusing opinions. Help is always needed for Newbies.
Thanks Again
My answers, not having read the above answers.
1. Yes, interest will be charge as soon as you use the money.
2. Rent should be paid into your 100% offset account attached to your home loan, ideally. From there you can direct debit it. You cannot rely on the rent to pay the interest as it will vary each month, and sometimes will be late.
3. There are tax implications to this, but ideally you could borrow from the loc to pay the shortfall – talk to your tax advisor
4. No. A LOC is not an offset and putting extra money in there, even temporarily, will result in tax issues if you ever need access to that money. It would also make more sense to place any money into an offset account against you home loan instead as this will save you deductible interest.
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
In most cases, I am not an advocate of the LOC. It would be much cleaner, and save on costs, to use split loans over one security with an offset facility attached. There are good reasons to use a LOC, i.e. a portfolio product that may be used to capitalise interest and re-distribute credit limits if you have numerous Investment properties. But this does not seem to be your case. Too often, people use a LOC without a specific need increasing their costs to investing. Without knowing all your personal details, that is a NO to LOC from me.
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