Hi everyone, rookie investor here,
Does this make sense? I have one investment property with approx $20-30k equity, IO loan with offset. If I increased my current loan to gain access to the equity and leave that money in the offset account – the amount of interest I would be paying is the same as what I am paying now (pre re-financing, assuming interest rates stay the same)?
I’m not quite ready for my next IP but wanted to lock in any equity so that it was ready to go when I needed it and in case the banks make it harder to access it.
Thanks in advance
LizYes – and in many cases is a prudent move. Just make sure the equity is ‘accessible equity’, theres a difference. For example:
A property worth 500k, with a 450k loan has 50k in equity, giving it an effective LVR of 90%. It however has $0 accessible equity, as the lenders will not allow you to exceed 90% LVR for a topup/equity release.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Welcome to this site Elizabeth. You’ve asked a fantastic question & many of us can learn from it.
Hi Corey, it is obvious that you have an in-depth knowledge – I’ve read many of your entries & am learning a lot from you.
Could it be that you believe Elizabeth is referring to a PPOR loan……..instead of referring to her investment property loan?
I am assuming that she would also use her Offset account for personal use (as well as a possible future investment property deposit).
Would increasing her investment property loan cause issues when calculating her interest deductions on that investment loan? (taking into account that she may use some of that money for personal use when spending from her Offset account). ie: Equity Loan purpose being tainted & that kind of stuff.Would it be better for her to setup a separate LOC & not increase her investment property loan amount?
I can see that your reply would be OK if it was a PPOR loan but not for an investment property loan (as she states).I’m probably mistaken – if so, I am missing something important & still have a lot to learn – all good.
Cheers & keep well.
I’m not sure what you’re getting at Pimobpi – it is nothing to do with the type of security type, but LVR requirements. You cannot exceed certain LVR’s on property, as there has to be a retained portion on each property, generally a minimum of 10% if you’ve paid LMI, else 80% LVR.
Generally you setup a separate split as this can make it simpler for accounting – but if both the original loan and future use of the equity release is both investment purpose, it won’t cause a mixed use loan (non deductible vs deductible) – but would require your accountant to apportion interest charges per property.
You do NOT want to use any saved funds in offset as a deposit for an investment if the borrower has personal debt elsewhere, as this could be cycled through their PPOR through a debt recycling strategy.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Hi Corey,
Liz does not indicate how she uses her Offset account. Perhaps she only uses it for investment purposes. If so, I don’t see issues.
Are there issues if she used her Offset account for personal purposes? (Considering that the equity released funds are also located in that Offset account).
If Offset is used for personal, wouldn’t it be prudent for her to setup a LOC instead & not put the equity into the Offset? She could then use LOC whenever the purpose is for investment & use Offset whenever the purpose is personal. It will still release her equity (subject to LVR requirements that you have given).
I understand that accountants can work out the apportion calculations etc whenever there are mixed withdrawals however that takes time & money to complete. I also understand that LOC interest % are usually slightly higher than other investment loan interest %.
I apologize if I was again unable to clear up what I am getting at. It must be my current level (or lack of) understanding.
Cheers mate.
Hi Pimobpi,
I agree, Elizabeth’s question is a great question, and Corey has answered it with as much as he could, given the information provided:-
Just make sure the equity is ‘accessible equity’, theres a difference.
That quote (to me) is the key. Elizabeth said “I have $20k – $30k in Equity”. What was NOT said was if it was available equity.
e.g. Using Corey’s example, if Elizabeth’s IP has a value of $500k and a mortgage of $420k, then she does indeed have $30k of AVAILABLE equity.Repeating Corey’s main point, a lender will not re-finance at a higher LVR than 90% – so if the mortgage is at $450k or higher, then there is no available Equity (even though there is $50k of Equity in the IP). It is a VERY important point, and one that has shattered many an early investor’s dreams.
One option that MIGHT give Elizabeth more available Equity would be to look at shifting lenders. This adds complexity, and may (or may not) be a viable option based on serviceability…. But what if she could take out a 95% loan with a new lender? Then (ignoring other costs) the val of $500k allows a loan of $475k, less the mrotgage that needs to be paid back ($450k? $420k? whatever it is) allows more equity to be borrowed. That then affects the serviceability when calculating if a second IP is a possibility – so a darn good time to check all this with a MB (like Corey and others on here) BEFORE doing anything.
And Pimobpi, good on you for questioning – I hope that hearing the information in a different way has you come to a better understanding.
Re your comments about Offset accounts, Elizabeth has an IP (and maybe NO PPOR??) going by this comment from her:-
I have one investment property with approx $20-30k equity, IO loan with offset.
Re “using her Offset account for Personal Purposes” you might like to have a read of this offering – it answers some of those kind of questions:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973
Enjoy!!Benny
Hey Benny, thanks for assisting & for providing the useful link.
I must be giving out incorrect vibes. The “available equity” LVR subject was clear to me from the beginning. That is not where I wanted further assistance but I appreciate your reply about that topic. I understand that many property owners have equity but only 80% to 90% of that equity can be made available to the owners. Banks like/need to retain 10% – 20% of equity for their own protection purposes in case of defaults or whatever reason. Corey was alerting Liz to the fact that her equity may not necessarily be available for her to extract & to make sure it was available equity. All good there.
The clarification I seek is “could there be future tax problems if the extracted equity is deposited into her Offset account? (considering that her Offset account may be used for a mix of investment & for personal uses)”. My opinion is that tax issues can arise if Liz plans to deposit the funds into her offset account instead of using a LOC. I came to this understanding from the info below:
I have separate tax advice & there is also similar tax advice on this forum:
“it is possible for investors to borrow extra & to have the cash deposited into an Offset account but………better not to do this as investors will run into tax problems………Use a LOC instead”. And, “equity is better accessed through a LOC”.Now, if LOC is a better way to access the equity……that is what prompted me to ask whether Liz should access her available equity by depositing money into her Offset account (using Offset is how she is planning to do it & she is asking whether that makes sense) or whether Liz should have be given advice to setup a LOC instead?
Liz asked whether it makes sense to increase her investment property loan & to leave that money in her Offset account. This is not my question, it is her question.
From the info & advice I provided above, I believe that Liz should have been advised not to place the extracted equity into her Offset account (unless she could prevent running into those future “tax problems”). She didn’t get that advice from Corey & I wanted to know why. He is obviously a specialist in his field & everything that I read from him is helpful, I respect him a lot. I just wanted to know if Liz should access her equity a better way.
Lastly, I appreciate your comment about it being good for me to ask questions whenever I need clarification. I would also like to say that I don’t mean to annoy any of the members with my questions. I’ll try to do more reading on the topics before I write entries.
Cheers & thanks.
Thank you for all your replies. I am learning a lot here and loving it. I did not know about the difference between equity in your IP and accessible equity so thank you Corey for defining that.
The $20-30k equity I mentioned does turn out to be accessible equity (yay!). My bank has a feature in my online banking that shows the amount of equity in your property that they deem “accessible” and it is a smaller amount than if I calculated property value minus loan amount.
Structure wise I will need to do more thinking about as I have not considered any tax implications such as the ones mentioned by Pimobpi but I am clearer on knowing I do want to move on locking in that accessible equity sooner than later thanks to this discussion thread.
Hi Pimobpi,
OK, I see where you are coming from. Since your question is firmly in the realm of finance, thus needing input from a Mortgage Broker or similar, I will certainly refrain from stating very much. What I will say is that I believe you are firmly on the right track – and that mixing of personal and investment monies can lead to pain.Now whether an LOC is the “right way to go” to access that available equity, I can’t say. I will leave that to Corey or one of the other advisers re finance. :)
Benny
Yes there will be tax issues, a few in fact, if you borrow money and deposit that money into the offset account. Don’t do it without tax advice.
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 Elizabeth,
Your current lender would be determining your accessible equity using the valuation they have on file, which may or may not be old, depending on when the loan was set up. If it was a while ago, you may have more, the same or less equity available, depending on the market you are in. It would be well worth your while engaging a broker to look at your current situation, so they can advise you on structuring, and also get them to order a bank valuation so you know for certain what is available to you.
Regards
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