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Do offset account funds = equity?

Discussion in 'Property Finance' started by Songo, 8th Aug, 2015.

  1. Songo

    Songo Active Member

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    Just a quick question here from a newbie....

    I have an interest only loan with an offset account. I've moved o/s and the property was my former PPoR. By the end of this year, I want to use equity as seed money for an IP.

    Do the funds in the offset account count towards equity or must the principle be paid off? For example, say the property is valued at 400k, the loan amount was 300k and there is 40k in an offset account. Is the equity calculated as 400-300k=100k or 400-300-40k=140k?

    Given that 80% of equity is accessible, what would my borrowing power be at LVR=0.8?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Can work 2 ways, most straight forward would be to increase the loan amount up to acceptable lvr against new value of property and leave offset money where it is.

    Alternatively, you could pay you offset money off of the principle first, then do as above.

    Which is better depends on your tax situation and whether you plan on returning to that ppor sometime soon. I did similar to this using @Corey Batt expertise as he knew exactly how to navigate thru it all.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. Songo

    Songo Active Member

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    The loan is interest only for 5 yrs, so whilst I could change the loan type and inject the funds in the offset account into the principle, this will incur a fee. I definitely will not return to this ppor, but a little extra context might assist here. I live o/s and so I am a non-resident for tax purposes. Whilst I am o/s I never want to be positively geared, but my strategy is to remain close to neutrally geared from a cashflow perspective, which thus includes the interest payments, and then allow the depreciation schedule to create deductions aginst future income (eg: if I return home or the investments become positively geared).
     
  5. D.T.

    D.T. Adelaide Property Manager Business Member

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    No fee. No one said anything about changing the loan type
     
  6. Songo

    Songo Active Member

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    Hi Terry, thanks for the response. Rather than reply in the other thread, I'll keep it here for clarity. My situation now refers to option 2: offset account is with an investment property, therefore, the interest payable is deductible.

    My question could be re-phrased as, do I actually need to withdraw the cash from the offset account in order to make up the deposit on the future loan amount? As you mention, in the short term it shouldn't make much difference because any increase in interest payable on property #1 resulting from withdrawn funds will decrease the LVR (and thus interest) on property #2.
     
  7. Songo

    Songo Active Member

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    The loan I have is currently interest only. If I want to make voluntary payments off the principle it incurs a fee at present (in future it will switch over to principle + interest). If there is no reason to incur that fee, then I would be silly to bother with that option. So right now it sounds like what you mentioned first is the "easy" way to go. Having the cash liquid is useful also.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I have never seen a variable loan which charges a fee to make an extra payment. Are you sure about this?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Unless you have available equity you would only have 2 choices
    1. Use the cash to invest directly, or
    2. Use the cash to pay down the loan and reborrow to invest.

    Which option you choose will depend on the situation. If you will never move into the existing loan again then paying it down may not give any extra advantages. Same tax consequence if you use cash or pay down and reborrow.

    If there is a chance you could be selling one property at some stage then there will be different consequences.

    If the properties will have different owners - .e.g. property A owned by you and property B owned by you and spouse then there will be different consequences.
     
  10. Songo

    Songo Active Member

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    Actually you're right, I just checked. The fee is only incurred if I want to alter the loan type from interest only to principal + interest ($250). However, if I want to use the cash in the redraw facility to permanently reduce the principal I just need to fill out some form and they'll do it without a fee.

    So in that case my understanding is that I either withdraw the cash and use it for the deposit, or I use that cash to permanently reduce the principal which then increases the equity (and then I can borrow against the equity instead of fronting up the cash)?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes.
     
  12. Songo

    Songo Active Member

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    Thanks Terry!
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Be wary that some io loans don't have redraw

    Obvious but pls check

    Ta

    Rolf
     
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  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The way I see it:
    * Equity is the difference between the value of the property and what you owe. Keep in mind you can't draw all the equity, the bank needs to keep a happy LVR first.
    * Funds in the offset account are savings. You can turn savings into equity by using funds in your offset account to pay down the loan, but generally it's best to only do this if you don't already have enough available equity to meet your objectives. Your savings is the last money you should use for investment purposes if it can be helped.