Line of Credit VS Offset account

As Terry says.

IMO i don’t see the needs to be paying a premium rate for a LOC product when an IO loan with redraw does exactly the same thing.

Certainly horses for course but a mix of both seems to suit most.

Cheers

Yours in Finance

I agree Richard, but it depends on the bank. If you can pay directly from the loan account you would be better off avoiding the LOC option. If you cannot then you run the risk of losing deductibility of interest by borrowing and parking into a savings account and then paying out.

I don’t usually set up LOC’s for clients these days. Agree with the others above – when a variable IO loan can provide the same function albeit at a lower cost….it doesn’t make a whole lot of sense to get up LOCs

Cheers

Jamie

My strategy with Accessing equity is to use a io loan if it can used toboay directly from the loan account. But if it cant then use a Loc and once drawn convert it to a io loan.

This is more work but avoids the tax risks.

Major advantage is deductibility of interest from a LOC
money from an offset would not be deductible.

Disadantage of a LOC is that it is at call, not good for a developer, so once it is drawn convert it to a IO loan.

If you can use a IO that can be redrawn and paid directly from the loan account then this would be even better.

Hi Fintrack

I think you have confused a few things. Loan purpose for the original portion stays the same, but it can get messy.

If you redraw from an investment loan the interest on the loan doesn’t become non deductible.

There are three ways it can end up
1. You withdraw from an investment loan and use those funds for that investment property (which the original loan relates to). No problem here. All the interest would be deductible.
2. You withdraw from an investment loan and use those funds for personal expenses – such as groceries, new boat etc. This loan would now be a mixed purpose loan with 2 purposes, one being an investment purpose relating to the original loan and the other being private purpose. The interest on the private purpose would not be deductible. You would need to work out the percentages and claim only the investment portion of the interest.
3. You withdraw from an investment loan and use those funds for another property which is also an investment.
Here you would have a mixed loan, but the whole of the interest would still be deductible. You may have issues later on when selling a property or issues now apportioning interest if the owners of each property are different (e.g. spouse on title to one but not the other).

Yes I can back that up with authority.
You could read the case of ‘Domjan’ for starters.

Your clients should seek tax advise asap.

I don’t understand what you mean.

Example

John has a loan of $80,000 secured by an investment property with plenty of equity. The loan relates to the purchase of that investment property.

John now needs $20,000 for an urgent kidney transplant.

John increases his loan to $100,000.
Going forward 80% of the interest should be deductible.
This is a mixed loan

But just should not increase his loan like this. John should have set up a separate split of $20,000 and kept his $80,000 loan as is.
This way John could pay down the $20,000 and keep the $80,000 as is. This would not be possible with the mixed loan because any repayment would also come off the $80k portion too.

In that case it would be similar to John in my example above