Question for the Finance people out there!

LOCs are great, but they should only be used to access equity.

By using a LOC to deposit and withdraw money you could be creating tax issues down the track. You can acheive the same effect by using a 100% offset with a IO loan (or even a PI loan) – plus htey are cheaper as GOM points out.

Hello Jacqui

IO loans usually have the same exit fees as PI loans. Not usually any extra penalties or restrictions. IO loans are generally IO for an initial period (usually 5 to 10 years) and then revert to PI, or you can extend the IO period.

I don't like the sound of that misa account! Don't know about distinguishing it from the loan with deposits either.

I don't think you understand, fully, the tax implications of a LOC. They are very good for accessing equity, but for the main loan are not so good unless you just treat it as an IO loan. And if you do that then you might as well have an IO loan on the lower rate.

The tax implications are this (something i wrote before):
Every time you pay money into a loan this is a deposit.

Every time you withdraw from a loan this is considered new borrowings.

Deductibility of interest depends on what the funds borrowed were used for.

So, say you had a $100,000 loan for an investment property. Generally the interest on the whole amount borrowed to purchase the investment property will be deductible.

Say you set up your loan with the idea of saving interest and you had arranged for your monthly salary to go straight into the loan. This will save you interest as your balance will immediately decrease.

So you had your $5000 wage deposited into the loan account. The new balance is $95,000.

The next day you take out $4,000 to buy groceries and for living expenses. The ATO will consider this to be new borrowings. The interest on this $4,000 will only be deductible if the funds were used for investment or business purposes. In this case it won’t be because the expenses purchased were of a private or personal nature.

Now you have a $99,000 loan, but only the interest on $95,000 is deductible with interest on $4,000 not deductible.

This is just the first month.

You then do it again and again. Assuming you were paying the interest separately and in addition to the wage being deposited you will have paid the tax deductible loan off in 20 months, but you will still have a non-deductible loan outstanding of $80,000.

A way to have avoided this and still have saved the same interest without the tax complications would have been to use a loan with a 100% offset account attached. All money, savings, wages, rents etc should have gone into this account. This would save the same in interest as if you had paid it into the loan.

Hi again

I think your LOC method will work, but if you were to ever move out of your house and rent it you would have tax problems. If you had no intention (remember things change) then it will be ok – except you will be paying a slighty higher rate for no reason.

But if you moved out it would be too late. Your whole loan may be undeductible.

When you originally borrowed the money it would have been used to purchase the house, but as you put money into the loan this is a repayment. When you take money out this is new borrowings. So the original borrowings used for the house purchase may be rapidly reduced to nil, and the new borrowings for personal expenses may be increasing, so the net effect is a high loan balance with hardly any of it attributable to the house and therefore not deductible. All this could be avoidable if using an IO loan with offset.