Ok so i’ve done a fair bit of searching through these forums on these two types of loans, but you all talk about them for investing purposes (obviously, it’s a investing forum).
But i am about to purchase my first property to live in. I’m totally confused about these two loans, some people swear by the LOC and think we’re mad not to go with this, others say it can get us into big trouble and advise to go for it, but instead go for an Offset which has pretty much the same features.
So for a first home buyer, is the LOC a bit too risky to take, and does it really have any advantages on paying off your loan quicker over the years??
Cheers
Dan
P.S. I read Roberts word document covering this, but i was still unsure as it was directed at investing.
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We had a LOC for four years with one bank and at the end of four years, owed the same amount. Admittedly the loan was for less than $40K and we had a much larger investment loan which we paid each and every month, because we had to.
With three growing boys, our cost of living was escalating, so I would keep drawing the LOC to it’s maximum. I also kept my credit card up to it’s maximum (only $1500 limit) which only cost me a couple of dollars interest each month, but it frustrated me that I couldn’t seem to get rid of it.
Whilst I was always very disciplined with our investment loans, I just found the LOC too easy to keep drawing down.
Eighteen months ago, we restructured under a professional package and changed our housing loan from LOC to P&I and haven’t looked back. We are with Westpac and anything sitting in our every day account is fully set off the housing loan. If we need to, we can redraw on the housing loan, but I really think twice about doing this.
Personally, I would not go down the LOC path again. The package we are now with is much better and for the first time in my life, I pay the credit card off each month.
Regards, Wylie
I personally would use an IO loan with offset.
This is my reason. Often first homes are soon outgrown. People either sell and buy an new home or, increasingly more popular, people keep the old home as an IP and buy a new home.
Should you decide on the latter the loan for the original home is now tax deductible as it is an income producing asset.
Because all of your equity (paid off equity anyway) is in the offset, it can be removed from the offset to buy the new home leaving the full original debt tax deductible.
This way you maximise the size of the deductible debt and minimise the non deductible debt.
If you drew these funds from a redraw or a LOC then the purpose of the drawing/loan is for a home so no deduction.
I fully endorse earlier post about the dangers of LOC – remember an LOC in effect is a huge credit card secured by your home. I have enough trouble with my $5000 Visa – no way do I want a $200K Visa!
All the best,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
thanks for the responses so far.
The information which you sent stated that a LOC loan has an average life of 4 years, I disagree
the loan will be almost a lifetime arrangement to allow the user complete financial flexibility,
as an example: holidays, upgrade furniture, loan family, new car, whatever, or simply have
no debt but with the luxury of having funds at your disposal without having to apply at the
Bank or Credit Union for funds.this is just a comment someone made to me when i showed them some things on this forum.
the loan will be almost a lifetime arrangement to allow the user complete financial flexibility,
as an example: holidays, upgrade furniture, loan family, new car, whatever, or simply have
no debt but with the luxury of having funds at your disposal without having to apply at the
Bank or Credit Union for funds.^^ can i still do this with an offset account?
from what our broker told us, yes we can, correct??
Thanks for your help.
Yes you can, however you can only access your funds accumulated in the offset – it won’t be an approved credit facility like the LOC.
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
ok, i see.
Also, with a LOC i’m told your money is “always working for you”
i.e. you get paid say $5000 for the month into it ALL of this is then reducing the loan. Obvisouly you take bit by bit out for bills etc.. But the interest is calculated daily.
But with the offset, you have to put money into the offset account, and only this is reducing the loan.
correct?
I know with our Westpac housing loan, our every day account (husband’s pay goes in, rent goes in) is fully offset, so the benefit is the same as we had with our LOC. In effect, we don’t have to deposit anything into the offset, it is our daily account.
Regards Wylie
Originally posted by muli:ok, i see.
Also, with a LOC i’m told your money is “always working for you”
i.e. you get paid say $5000 for the month into it ALL of this is then reducing the loan. Obvisouly you take bit by bit out for bills etc.. But the interest is calculated daily.
But with the offset, you have to put money into the offset account, and only this is reducing the loan.
correct?
An offset can work in exactly the same manner as the LOC. You indicate a savings account as your offset – all your pay goes into it and living expenses come out of it.
Interest on your home loan is calculated daily in exactly the same manner.
I have offset accounts at well under 7% whereas LOC are usually a bit more expensive.
By all means use either – you will achieve the same end. I just happen to prefer one to the other.
Cheers,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
I think that in your case Muli that a home loan with a Mortgage Offset account is probably your best solution.
I think Line of Credits are excellent facilities when they are being used for the purpose for which they were intended.
However, I think that your main aim is to pay the home loan off in the soonest possible time frame, rather than using the equity in your property to accumulate assets such as shares.Down the track, into the future, if you do wish to purchase shares and you do want to use the equity in your property to do this, then it would be a great idea to have a Line of Credit added to your loan facility. However at this stage an Offset Bank account gives you all the benefits of the LOC, with a lower rate of interest being charged. LOC’s are really something to look to in the future, rather than being something which will suit your current requirements.
I hope this helps you in making a decision.
Cheers, Lamb
LOC requires a lot of budgeting and watching your spending habit’s..IMHO an Offset Account is better.
Hey MH, can you have an “Offset account” attached to a FI-IO loan then?
I thought i had read about this here, but have been told not possible? Looking at WESTPAC at the Moment..
REDWING
Changed my Avatar as i’ve had a haircut [biggrin]“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorFrom an interest calculation angle, and offset and a LOC will be exactly the same.
But from other angles they will be different.
eg. by using an IO loan with an offset (as suggested by Steven) you would not be paying down the loan, but would be saving interest as if you were paying the loan down by the amount deposite into the offset. This may help if you were to move properties as you could just take your money out of the offset, leaving the loan balance the same and use this money for you new property. This would mean the interest deductions on your remaining loan would be high, resulting in tax advantages.
LOCs also have higher interest rates, usually, and often have fees attached.
I personally have both, but only use the LOC for business/investment purposes. All my day to day income goes into the offset account.
Terryw
Discover Home Loans
North Sydney
[email protected]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
so..you can have an Offset attached to an IO Loan?
The banks are Happy to do this?
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorYes red. That is the best way to set up an offset. Why would you attach one to a P&I loan?
If you are looking at spending issues when comparing LOC and Offset Accounts, you are looking at the wrong thing. You can get into trouble with either one just as easy.
You must look at the benefits of one over the other… such things as tax benefits when comverting a PPOR to an IP, ongoing cost of the loan, interest rates, flexibility, etc.
A true LOC does last for life but the average loan life these days is less than 4 years. I would not even look at loan term!
TMA
http://www.email4money.info
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