Just wondering what the pro's, con's and differences were between an LOC and an Interest Only loan with an offest containing the drawn down amount.
Was enquiring with a broker regarding an LOC and he was asking why I didn't go with an Interest only loan. I was thinking because I didn't want the full amount drawn down immediately but was thinking if the loan had an offset which you dumped the drawn down amount it would work the same as an LOC. So just wondering what the differences are between LOC and IO loan with offset?
They are totally different products and should only be used for different purposes.
LOC should only be used to access equity.
An offset account is used to store funds and save you interest without paying down the loan.Never put a LOC on your home and have you wage go in and out and then take money for investing from it. It will be a tax nightmare and you will end up paying much more tax.
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
Thanks Terry
My broker was mentioning an Interest Only investment loan with an offset account to access the equity as opposed to using an LOC so just wondering what the difference/benefit isfor each.
Do you mean borrow extra and put it in the offset until you use it?
I have done this myself, but wouldn't suggest you do it as you lose, or weaken, the link between borrowing money and investing it. If you were to place any other funds in the account your may break the link completely. Safer to use a LOC for the extra equity and the IO loan for the main part.
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 I might be mis-understanding the concept. The 2 scenarios were:
1. setup an LOC lets say for example $100K
2. take out an interest only loan of $100K using equity and put that $100K into an offset account attached to the new interest only loan until the funds are needed and withdraw from the offset account when required.
In both scenarios this would be for deposit/costs and 2nd interest only loan would be set up for balance.
Maybe this 2nd scenario is not possible and I have misunderstood
1 would be preferable.
with 2 you are borrowing money to put into a savings account, not to invest. If you later take the money out and invest it could be argued that the money is not borrowed and therefore the interest not deductible.
Something similar happened in the case of Domjan. Domjan borrowed money and parked it in a savings account before investing it. Full interest deduction was denied, from memory, as she had not invested directly with the money.
If you do do it, make sure you get written advice from your accountant first – and never put any cash into the offset mixing it with borrowed funds.
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
Thanks Terry
question with the LOC, how do the repayments work I see some places saying no regular repayments are required as long as it doesn't go over the facility limit, but other places saying a minimum repayment is required. Also in the case no regular repayment is required I'm assuming the interest just gets deducted from whatever credit is available as long as it doesn't hit the facility limit.
Yep thats right. Some require no payment others min interest per month. If you don't pay interest is capitalised with the loan increasing.
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 have a similiar question to this…
If i have a standard variable acc with redraw facility and then attached an IO standard variable (for IP) and the way to access the funds for deposit for IP is redraw. Would this be ok for tax purposes?
Would I have to get a separate account to where the redrawn money goes to for investment purposes..The bank says this is a better way than a LOC as it has a lower interest rate and you still only need to pay interest on what you redraw??
No, it is not ideal – if the loan is non investment related you will be mixing deductible and non deduction debt.
Every time you make a deposit part of the principle of the investment loan will be paid off and this will reduce your tax deductions.
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 dont think i get it.
400k PPOR loan PI
then 80k loan IO – this loan has a seperate acc number but is attached to home loan as this is the security. We only pay interest on what we use similar to a LOC.
Why would making a deposit to the PPOR affect the IO account that has a completely different acc number?
If it is a separate loan account, then it should be ok.
Just make sure you borrow straight from the loan and invest – don't park the money in a savings account/cheque account first.
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
Thanks Terry,
So when we redraw the deposit for the IP it cant be redrawn into our transaction account for even a few hours/day?? or is that ok
No, i would advise against that. You may break the link to the borrowing of the money.
Once you put money into a savings account it is no longer borrowings. So if you take money out of a savings account to invest you are investing cash rather than borrowing money. see Domjan's case.
It may not be picked up, and even if it is the ATO may allow it, but not worth the risk i think. If you want to do it, make sure you have a new account with no other money in it.
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
Great advice thanks!!!
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