100% Offset Versus Line of Credit

Apart from the fact that a LOC has no term, there is very little benefit. In fact it simply lines the pockets STG or other financial institution whatever the case.

I would only use a LOC if you are in serious doubt of future income.

http://www.birchcorp.com.au

Err not so.

Jamie’s answer explain offset and LOC perfectly.
Terry and number 8- provides a good point about the tax consequences ( which is really important and could save you thousands!)

karlm – to answer your question, yes you can have an offset account with a LOC; but NOT with St George bank.
It’s offered by NAB, ANZ ( sub accounts)…just to name a few.

Regards
Michael

ANZ one is- they are sub accounts.
NAB one is the same account – so a true offset.

Either way, having the LOC there can cause a lot of tax issues; once you start mixing non table debt with taxable one’s, and then it an get more messy with the offset…
Having the offset is more of a “marketing tool” i reckon.

LOC is only good if it’s ALL investment and no contamination.

Regards
Michael

Michael

The NAB one does appear to be a LOC with the offset option, but is it really an offset account of just a redraw facility?

That is great then, very flexible. But I woudn't advise on using a LOC for the main loan, only to access equity for further investments. I guess the offset could come in handy for someone who has paid off their non-deductible debt and has some spare cash lying around.

what about the ANZ one. It appears to be an all in one thing.

Thanks Michael

That is ok.

Once you pay off the LOC you can then withdraw funds for a deposit on the next IP and to pay IP related costs. But whatever you do don't deposit wage or other income into the LOC. Use an offset account for this and then just pay the interest of the LOC every month.

Otherwise you will end up with a large loan with interest which you cannot deduct.

Hi

You have to be careful with the usage of LOCs it is possible to contaminate them from a tax perspective.
Firstly, withdrawal from a LOC is new borowings
Deposit into a LOC is a repayment of a loan.

The easiest way to explain is with an example.

say you had a $100,000 loan as a LOC
You get your wage for $4,000 and place it in the LOC. It is now down to a balance of $96,000.
You take out $3,000 to live on. This means you borrow $3,000. New balance is $99,000

If this was an investment property then only interest on $96,000 of the $99,000 would be deductible.

This is for the first month, imagine what happens if you continuously do this for a number of years. You could end up with a loan balance of $99,000 with none of the interest deductible.

If the loan was on a PPOR and not being used for an investment in anyway it is still not a good idea as you could more out of your home and rent it later on..

You should also not borrow from a LOC for an investment expenses if you have been using the LOC for personal use.

If you are using a LOC for the deposit on an investment (and this use only) and borrowing the rest via an IO loan, then I would still suggest you not pay down the LOC, even if the rate is higher. You should be paying down non-deductible debt first, or putting the spare cash into an offset account on the non deductible loan. This will save you more.

Once you have no non-deductible loans left then you can set up an offset account against your investment IO loan and store the cash there. It is not good to pay down an investment loan as your money is locked away and cannot be withdrawn without tax consequences.