LOC for maintainence and repayment surplus

in regards to the LOC i was just reading an article about this in the new API i just got in the mail.  so maybe grab an issue to read.

it stated that the LOC interest is tax deductible.  and supported the use of these loans to pay for those other IP expenses.  i had never thought of using them that way and im so glad that was brought to my attention cos it would really help us move further with our investing.

we were wanting to purchase another 2 renovation IPs, hold them for only a year, then sell.  we have cashflow issues which we are trying to rectify so we are wanting to build up a cash surplus to help us move onto bigger and brighter things (hopefully these two renovation projects will help us get some savings).  if we can set up LOCs on these two properties after we have done the renovations it would help us service the loans up until they sell after 12 months.  not sure if itd all work out cos i only just read it this morning but its certainly something we were gonna look into more over the coming couple of months.

The LOC method is an excellent approach. Why use your cash for investment expenses when you could be using this to pay down your home loan and saving non deductible debt.

But you will need to be careful how you set this up, especially if you are paying interest by borrowing from a LOC. If you don't take care you could be entering a scheme with the dominant purpose of saving tax – and the ATO could disallow it under part IVA of the tax act.

Do a search for Hart's case. Hart v FCT.

As for cross collateralising loans – I think you should avoid it. Look at your mortgage documents and see if the security listed is one property or two. if it is two then = crossed.

Why pay rent into the LOC – have it paid directly into your 100% offset account attached to your home loan. Save non deductible interest first or you will end up paying more tax.

Best to try to limit your LVR to 80% I think. any higher is very risky, especially these days. If you do want to go higher you can set up a LOC on each property. If you keep crossing it will only get messier and harder to unravel later on.

whoa – beware!!! The redraw is totally different from the offset account. Some lenders say they are the same but there are serious tax consequences. This may not make a difference immediately, but if you were to ever move out of your current house to rent it you may, or will, pay more tax.

Basically when you deposit money into a loan it is a repayment. When you take it out again it is new borrowings. Having an offset avoids this problem.

What they have said is correct, but not totally true in regards to having the same benefits.

I guess no harm will come if you never intend to move out and rent the place – what ever you do, don't use this method with an investment property or you could end up with a large loan but not able to claim any of the interest.

Yep.

Crossed collateralised means there is more than one property being used as collateral.

So if you had property A securing loan 1 and then get a LOC Loan 2 on the extra equity in Property A. Then you go out and find property B, borrow 80% of this with a bank, loan 3. This loan would only be secured by property B. The 20% deposit would come from loan 2, the LOC. So each property would be stand alone and not crossed.

But you have to be careful as some bankers will put down property A as additional security for loan 3. Some won't even ask they will just do it and then you get the documents with settlement due in days time and its too late to change often. So you need to be careful when applying and specify which property will be used as security for which loan.

Good morning everyone
Please someone enlighten me on what LOC, also API are, and where I might acquire copies of API?
Thanks, enjoy your day!
Cheers,
Liz

I am with the same lender and even their product Fact sheet says:

Features:
Unlimited redraws   Yes
Additional repayments  Yes
Offset   Yes (100% offset facility built into loan account)

I will probably clarify with them to make sure its real offset facility.

So when the kids leave home you will definitely sell it?  Maybe not. So you will have a fully paid off house that you want to keep but not live in. If you rent it out you will have no interest to deduct. But you will have a non tax deductable loan on the new smaller home you will move into. (just giving alternatives here).
If you have an offset account your mortgage is still in effect getting down to zero but the difference is the money is yours to do what you want with it (maybe buy that new home and rent this one out with tax deducxtions/ have a holiday -whatever. It just keeps your options open.
I like having options.

You should be right I think as you have fully repaid the funds borrowed for personal use. So when you borrow for investment purposes 100% of the outstanding balance will be for investment.