We currently have a Line of Credit (LoC) & I’m wondering if what I’m thinking is feasible…
Say we find an investment property for $200,000…
Can we use funds from the LoC for the 20% deposit ($40,000) and then have a loan with the same or a different bank for the remaining 80% ($160,000)?
Or
Would we write a cheque for the $200,000 out of the LoC account, then after settlement have this new property included as a additional security for the original LoC?
After including the new property in the original LoC, this increased asset base & rental income would then allow for an increase in the LoC limit… thereby providing access again to most of the funds used in the purchase of the $200k property, for future investments.
I hope this makes sense and thanks for any replies,
Jack
Hi Jack
There is some thought to keep all your lending at the one place and there is some thought to spread it around, so that is one choice you have to make !!
I do not see any advantage in using all your LOC money to buy a new property and then just put it back into the LOC. later.
The disadvantage could be that there will be a different interest rate for your LOC as against a stand-alone loan. Plus you may like to have a offset account attached to it and leave the rents in that account to pay the debt, and transfer the remainder if it is positive over to your LOC after the repayment is transferred.
I would suggest you use only 20% and you might also find stand-alone loans are easier to obtain, maybe less initial hassle.
We have used the depoists only from our LOC unless we wanted to hold the deeds for some reason and then we have used the lOC for the whole amount.
Cheers LenPulling 20% deposits from the LOC is a very good way to proceed.
But, it may also be an idea to pay cash using the LOC at first, and then to mortgage the property soon after. If you are getting a bargin, you may be able to borrow more money this way. This is because banks will only lend on the lesser of valuation or purchase price. When you already own the property, they so not have this constraint.
Terryw
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Dear Len & Terry,
Thanks for your replies, its nice to get confirmation that I’m thinking along the right track.
I may have some misconceptions though regarding the relative benefits LOC & offset accounts.
What were currently doing with our LOC is placing all income from the IP & tax deductions directly into the LOC, then redrawing as needed (eg Bpay the rates etc.).
I was under the impression that an offset account used the interest generated by a separate investment account to offset against the interest debited in the mortgage account, but one wouldn’t be able to redraw from the mortgage account itself.
Whereas the LOC allows for the deposit & withdrawal of funds as needed & while funds are in the account, interest is only being calculated on the outstanding daily balance.
I wasn’t aware that the banks based their lending on the lesser of valuation or purchase price, that’s very interesting, as you say Terry, if purchasing below valuation then presenting them with a property you already own removes their option of using the purchase price.
Thanks again,
Jack
Hi Jack,
You have more flexibility with a 100% offset account than a LOC, you can organise for it to be interest only and then put all your money in it, not just rent. The debt stays the same, but the interest charges will be reduced. If you are paying interest only then there is no need to redraw anything, you just use the money building up in your offset account. With the LOC, you can not redraw money for personal use without creating problems.
Regards
Alistair PerryOne thing is to check with your accountant but if the current LOC you have has any funds used for your PPOR or any non-tax deductable reason you may have an issue with claim the whole interest on the LOC.
See if you LOC can have multiple accounts and if that can happen you can either create account for the 20% + expenses deposit or for the 100% + expenses.
If you purchase the IP outright with funding 100% from the LOC you and the IP has settled you can use that to get another LOC/loan or increase the limit of your current LOC.
This will allow you to purchase other investments.
ChrisAll post are IMHO.
This follow up information is much appreciated… it’s been most informative.
Thanks again,
Jack
hi Wantok
If you use the loc to purchase and then get a lender to revalue,
even if its the same back the lending criteria is not the same and the people looking at the lend are different.
so is a good idea to use the line of credit to lend on a property get a lend on the property once you own it
put the money back into the first line of credit so it neutral and then organise another line of credit on the second property this gives you access to more money if needed.
It also makes the two lends stand a loan and doesn’t cross collate
I setup seperate companies and trusts and you can read up on them put yes most of these types of deals are done from line of credits and seperate line of credit once you have done one the next is just a mirror.
I am one for using different banks or lenders as it gives you flexability and I don’t put any more then two of my lends with any one lender.here to help
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