LOC vs 100% offset account for PPOR that will become IP

Hi Lisa

You have to be kidding me.

Someone want to charge you $4000 to set up your loan correctly something that the average Mortgage Broker does for nothing.
Also how partial can they be if they are coaching you in what to buy.

You are totally correct about the SGB offset account when the property is a PPOR.

Also another big disadvantage with the Dragon is that it is a condition of the letter of offer your properties are cross collateralised under their Professional package somewthing i would be running a mile from unless i had to.

Your thinking is however correct why not take out an IO loan from day 1 with 100% fully transactional offset account and get the best of both worlds. Dont use a LOC as you will have issued down the track when you rent the property out.

Hi Jenny

Those lenders that offer that charge a higher rate to compensate for it. Not worth it.

The days of having it waived at that LVR are long gone.

However get your Broker shop around as LMI rates went up 20% last week with some lenders passing on the full amount.

Hi Lisa

Probably need a little more hard data but there are a couple i can think of that we deal with regularly for clients.
Some have easier credit terms than others.

Hi Lisa, Westpac certainly has a fully transactional offset account. Offset accounts should be the only place all your private stuff sits. The LOC should only be used for investments. It's a great way to fund the 20% deposit required by the banks plus all the other costs, ie legals, stamp duty etc. It also can be used to fund extras along the way, eg if you want to install an aircon in an IP etc. You can set up a separate LOC sub-account for each property, but it's relatively straightforward to allocate percentages to different IPs with one account. I have a database program that does that, but any accountant should be able to do it easily. It certainly simplifies things with separate accounts, but only if the bank will let you do it without exorbitant fees.
   Never never use your LOC for any private purchases, because if you do, the only way to clear out the contamination is to pay the entire LOC off to zero, otherwise you have to apportion any interest accordingly, and what is the rub, you have to apportion any repayments appropriately too, ie you can't say "this repayment is for the private bit only".
   You can direct interest on the LOC each month to be paid automatically by another account, typically your offset account, or it can be set to self capitalise. I've only done self-capitalisation on a private LOC I had once, although some gurus here advocate capitalisation of interest under strict guidelines. Personally, I'd never risk it on an investment LOC. You can legitimately pay any expenses like rates and insurance from your investment LOC I believe.
  With respect to your lump sum of cash, you have a lot of equity built up already, and as a general rule I advocate never using cash if you don't have to. Your cash sitting in your offset account will be identical to having a loan reduced in size by using your cash as deposit. You should be using the LOC as a deposit, and saving your cash as long as possible. Only ever use your cash on your ppor if you have to resort to using cash, ie if your portfolio has expanded to the point where you've run out of LOC to fund further properties. Ideally you'll only ever use cash on your PPOR that you'll be staying in for a long time. You've certainly got the right idea keeping your loan IO if you intend to convert it to an IP in five years. Keeping cash out of the loan is the best way to go, but only if you can resist the temptation to burn it on an expensive holiday of course. You seem to have that under control.
  I've been telling my children this for a while now, keep your IP interest only, save all your cash for your own home. Now I wish I had set them up as P&I though, as none of them can save any cash! Generation Y should we wait!?
Cheers, s/c.

Westpac is my fav lender at the moment.

St G is good, but their offset accounts are confusing. There are a few different versions. One version actually reduces the principle of the loan. I even have one client on the offset that reduces the interest rather than the principle and he tells me the loan still also reducing.

That is confusing Terry; Westpac's is so simple: The formula is simply: daily Interest calculated for today is precisely: {(Yesterday's closing loan principal – yesterday's closing offset account balance) x (loan interest rate)/100 } / 365. Each of these daily contributions are added together at the end of the monthly cycle and then deducted from my offset account.
   That's what I feed into my database program which agrees to the cent with my monthly interest. The Dragon must have a strange combination of principal reduction and principal offset. I'd be interested to see the exact formula quoted as I have with WBC above.
   Challenge one of your contacts at St George to give it to you Terry!
Cheers, S/C.

Lisa that's completely fine with my lender. I tell them everything. The'll only be concerned about your LVR on each property and your debt servicing ratio (ie enough income relative to debt). They've never told me I have to stump up some cash if I have any lying around. I'm mainly limited by my debt servicing ratio after 11 year's growth.

PS just for the record, I have 4 property loans, 4 LOCs and 4 offset accounts with WBC, and I don't pay a single dollar of fees.