Is this a good way to go ?? what are thre down falls ? We are very financial , never missed a loan payment have no other debts besides our Home Loan , this will be used to purchase rental Properties , the amout is $ 430.000 if the properties re empty at any stage we can still aford to pay the loan.
Any thoughts ?Hi Celmel,
A line of credit is a fantastic tool for investing – providing you ONLY use it for investment purposes. That way, the interest paid on the account is tax deductable.
However, if you use your line of credit for private purchases, a new car for instance, than your line of credit will become tainted and you might not be able to deduct anything.Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
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Probably what you should have is a normal loan, preferrably IO, for the existing debt on your home loan and then a separate LOC for any equity up to 80% LVR.
When you invest you take the 20% deposit for the investment property from the LOC and borrow the remaining 80% as an IO loan separately.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Hi Celmel,
Agree with all points above, plus…
Depending on the lender, you might pay a 0.1-0.3% premium over a term loan product.
Different lenders will also allow you to capitalise the interest (i.e. don't pay the loan off) and continue to draw down until it's limit, which can make it an effective cash flow tool.
There are also more elaborate ways of using LOC's (refer to the Hart case) for more "efficient" structures that you might want to consider although I'd suggest specialist tax advice here…The LOC will only be used for the IP's and Is It ok to use the LOC to pay rates insurance etc for those IP , also using the funds for maintanence or repairs when needed with out affecting tax ? Def no cars or boats on the cards with this as we have worked very hard to own all we have ! other than the IPs
Yep, should be fine.
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
celmel wrote:Is this a good way to go ?? what are thre down falls ? We are very financial , never missed a loan payment have no other debts besides our Home Loan , this will be used to purchase rental Properties , the amout is $ 430.000 if the properties re empty at any stage we can still aford to pay the loan.
Any thoughts ?Hi Celmel,
we have a very similar situation to you that is set up beautifully, where our "investment property" LOC pays all the IPs bills, rates etc, and recieves all the rentals. It is also the source of our 20% deposit plus costs for any new investments. Any "spare" income from our day jobs we have gets chucked into there as well. We then have a different LOC for private expenses.
If costs to purchase are about 5% of purchase price, then this LOC has to supply 25% of cost of each new IP. Therefore the outstanding balance represents 1/4 of the possible total value of new IP purchases we can make. This is good so we always have a clear idea of what our limit is when searching out new properties.
Tax time is easy becasue you just allocate all the various ins and outs to each IP and figure out how each IP is doing.
In summary, I totally recommend it.
HC
You shouldn't be paying spare money into your LOC as you are paying down the loan. This is decreasing tax deductions. Best to put spare money into an offset account for the same savings but without the tax implications.
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
Terryw wrote:HCYou shouldn't be paying spare money into your LOC as you are paying down the loan..
good thing there is not all that much "spare money"! lol (lots of kids and cars and o/s holidays takes care of that)
House Call wrote:good thing there is not all that much "spare money"! lol (lots of kids and cars and o/s holidays takes care of that)Think Terry was refering to the rent should be going into your offset and not into the LOC
cmason wrote:House Call wrote:good thing there is not all that much "spare money"! lol (lots of kids and cars and o/s holidays takes care of that)Think Terry was refering to the rent should be going into your offset and not into the LOC
Now that bit I do not understand. I thought rent going into the LOC was a good thing because my interest bill goes down as balance falls (effectively "parking" money there).
Can you explain an offset account, then? I thought it is a positive bank balance account where the interest earned goes against your loan interest, but that the interest you earn on it is same as any other normal account (ie low interest rate) and therefore the benefits are lower than plonking the money straight into the LOC which will then save you the same interest rate as the LOC (ie save you more) than the offset.
House Call wrote:Now that bit I do not understand. I thought rent going into the LOC was a good thing because my interest bill goes down as balance falls (effectively "parking" money there).
Can you explain an offset account, then? I thought it is a positive bank balance account where the interest earned goes against your loan interest, but that the interest you earn on it is same as any other normal account (ie low interest rate) and therefore the benefits are lower than plonking the money straight into the LOC which will then save you the same interest rate as the LOC (ie save you more) than the offset.
someone else will be able to explain it better than me. The LOC is for investment purposes therefore interest is tax deductible so you don't want to be reducing the interest paid on it when you have non-deductible debt.
The offset account would be attached to your non-deductible debt(ie your loan on your PPOR), any spare money including rent goes into the offset, offsetting the interest paid on your non-deductible debt. Say you have a loan for $200K and $10K in the offset account you would only be paying interest on $190K.
Oh yes, I see. I don't really have any non-deductible debt. I just use the other (private LOC) as an overdraft facility if and when I need it (eg buy a new car
>rapidly repay—->back to close to zero again)Putting money into a LOC will save you interest but will cost you in tax.
Everytime you place money into the account it is a repayment of a loan. Everytime you withdraw money out it is new borrowings.
So if you put $100 in the LOC for one day and then take it out tomorrow to buy food the investment loan has decreased by $100 and the personal loan has increased by $100.
Imagine doing this every week for a number of years. You could have a $100,000 loan with none of the interest being deductible.
Whereas if you had used an offset account this could have been totally avoided – while saving you the same or more interest.
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
Terryw wrote:Putting money into a LOC will save you interest but will cost you in tax.Everytime you place money into the account it is a repayment of a loan. Everytime you withdraw money out it is new borrowings.
So if you put $100 in the LOC for one day and then take it out tomorrow to buy food the investment loan has decreased by $100 and the personal loan has increased by $100.
Imagine doing this every week for a number of years. You could have a $100,000 loan with none of the interest being deductible.
Whereas if you had used an offset account this could have been totally avoided – while saving you the same or more interest.
Except I never withdraw from that account for food, only investment related expenses. My separate account is for food.
I do understand what you are saying and agree, but I think we are not completely on the same page. I would have to tell you more personal specifics which is not really neccessary in this forum. I do appreciate your input though.
If you never redraw then it would be ok. But your money is trapped – you never know when you may want or need to take some out for personal expenses.
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
A line of credit can be a very handy facility to have in place should you ever wish to buy that investment property and need a fast source of funds. The other benefits are that you can simply pull money out of it to use for what ever purposes you choose but the repay the money as soon as you have it back, A classic setup would be to use a line of credit secured against your home as a source of deposit funds to purchase an investment property. Once you have setup the finance on the new investment property you can use the source of those funds to pay back down the line of credit. This works if you have sufficient equity.
A line of credit on your home simply for the purpose of repaying is not such a good idea as you can access the funds any time you want and can fall behind rather than getting ahead. I would always recommend a standard low rate home loan if your looking to pay off you home and gain equity fast.I have spoken very breifly about using a line of credit with a broker, he suggested it was a good idea to buy investment property. I am looking for feedback about using a line of credit on my first home as the deposit which i saw discussed by someone else in the thread.
The scenario goes.
I want to buy a property for ~500k –
20% desport is 100k. – Can i fully fund this through a line of credit
Apply for a 400k Interest Only Loan without paying Mortgage Insurance?I have 80k saved, which i would put into an offset account to combat the interest.
I figure if i do this i can it can save on Mortage insurance (~10-12k?) and also gives me the flexability with my cash, i hope to build a portfolio up quite quickly or renovate. I see this as being a simple and effective way to do, if possible.
Any feedback and advice would be great.
Cheers,
Steve.Hi Steve
Yes nothing to stop you doing that an in fact that is the way most Brokers would structure the loan for an investor client.
I am of course assuming that the 20% line of credit is secured against your PPOR. As long as you have sufficient equity in the PPOR then LMI will not be charged on this loan either. If it was you may be better off either paying down the PPOR loan with your savings and then reborrowing the same amount as it is non deductible debt and can be claimed.
Also link the offset account to your PPOR loan and not your investment loan.
Richard Taylor | Australia's leading private lender
Hi All,
Another question around loan structures.
I want to borrow $150K LOC against my PPOR (equity no problem) and $256K with another lender. My broker says I’m marginal on serviceability without including my wife’s income (about $5k pa part time)
My question is does this affect my tax benefit if we have joint names on the loan and only my name on the IP title?
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