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Line of Credit vs putting $ back into offset

Discussion in 'Property Finance' started by bythebay, 14th Apr, 2016.

  1. bythebay

    bythebay Well-Known Member

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    Hi everyone

    Can I run a scenario past you guys.

    Assume I have 2 IPs. Each has its own offset account against its own loan account.

    I'm trying to refi IP1. There are 2 options.

    1. Line of Credit for the increased equity of say $100k (which will sit as a SEPARATE and ADDITIONAL loan to the existing loan account of IP1). OR

    2, The bank will put the increased equity of $100k back into the offset account of IP1 (without opening a separate/additional loan account).

    Am I correct in thinking option 2 is far better?

    If I went with option 1, does this mean any future application by me to refi IP2 will involve the bank equating the LoC as a liability (akin to me having a credit card with limit of $100k) which will significantly eat into my serviceability? Can I avoid having this extra liability if I went with option 2 or will the bank see it the same as option 1 in processing future applications?\

    THANK YOU.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    no.

    Depending on the bank, I would set up a new IO split, get the extra drawn paid back into the split at settlement so that when you borrow them for investment later you will be actually borrowing them.

    See my tax tip 1 where i point out the legal issues with parking in offset accounts.

    btw you cannot put equity into an account. You can only borrow money and place it into an account. Both methods will result in a debt
     
    srirang likes this.
  3. bythebay

    bythebay Well-Known Member

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    Terry both are IO loans at the moment.
    Both investments, I don't plan to move into either in the foreseeable future.

    Oh yes take your point re incorrect ref to "equity in account". I meant increase borrowings against the property as per your post.
     
  4. bythebay

    bythebay Well-Known Member

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    assume bank is StG
     
  5. bythebay

    bythebay Well-Known Member

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    so if I have extra borrowings put back into offset, I can't use them later to buy another property and claim interest (coz I'm not properly "borrowing")?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The answer is 'maybe'. See tax tip 1.
     
  7. bythebay

    bythebay Well-Known Member

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    @Terry_w tried searching for tax tip 1
    but all the posts that came up was in format 10X ....
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  9. Tranquilo

    Tranquilo Well-Known Member Premium Member

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    Someone will be able to explain better than me.
    Option 1 is better because you don't want mix your release with personal money in your offset. Always have a separate new loan account and don't let tyr bank mix your funds
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, you would always want to split it. - I have written a tax tip on that too.
     
  11. Tranquilo

    Tranquilo Well-Known Member Premium Member

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    See Terry to the rescue
     
  12. Coota9

    Coota9 Well-Known Member Premium Member

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    So I have a similar scenario with a 50K loan that we took out to help our son with a deposit.

    The loan will be repaid in full shortly and we than wanted to than redraw funds out to go towards another IP deposit which I am guessing can't be done?

    So if I understand it correctly we would just open an offset against the original loan of 50K making it effectively a zero balance than draw funds from offset for future IP needs?
     
  13. chylld

    chylld Well-Known Member

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  14. bythebay

    bythebay Well-Known Member

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    thank you! let me check out the tax tip!
     
  15. chylld

    chylld Well-Known Member

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    Kegs86 likes this.
  16. srirang

    srirang Well-Known Member

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    Definitely do what @Terry_w is suggesting. This way, you have a clean structure that can be used to fund future purchases.
     
  17. bythebay

    bythebay Well-Known Member

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    Ok I have studied this tax tip (which I copy & paste below for everyone's quick reference) - by the way great tips Terry!!!! Keep them coming!

    Assume:
    - I don't plan to sell the IP
    - I have no PPOR debt (PPOR held in partner's name only), all my loans past & present (and at least in foreseeable future) are IOs for IPs

    So in such a scenario, it sounds like I could be better off with the offset option because I can get the following advantage?

    "Also there are advantages in borrowing as it will keep cash available for private expenses and will increase tax deductions if it is used for private expenses."

    ==============================================

    TAX TIP

    1. Don’t use Cash in Offset account to Invest

    Money in an offset account is cash. If you use cash to invest there is no interest to deduct.


    However where money is taken from an offset account the interest on the loan will increase but the interest will still not directly be deductible.


    There are 2 scenarios:


    1. offset Main residence loan

    If the offset account is attached to the main residence any removal of the cash will cause the non-deductible interest on the loan to increase. This interest will not be deductible because the loan is associated with a private purpose - the purchase of the main residence.


    e.g. $500,000 home loan with an offset attached containing $100,000 will mean interest is only charged of $400,000. If the $100,000 cash is used to invest, then the interest will be charged on the full $500,000. This will mean approx $5000 per year in lost deductions ($100,000 x 5%).


    2. Offset on an investment property loan

    With an offset attached to an investment property the situation is similar - withdrawing of the cash will not be using borrowed money so there is no interest to claim. But indirectly there will be because the interest on the investment loan will increase and the interest on this loan will be deductible against the investment property to which it relates.


    e.g. $500,000 loan with a $100,000 offset balance. Loan relates to the purchase of 123 Smith St. $100,000 cash is withdrawn to buy 456 Jones St.


    The interest on the loan for Smith St will increase by $5000 per year approx. The extra interest will be deductible against Smith St not Jones St.


    Does it matter whether you use offset cash from an investment loan or borrow?

    Immediately it won’t really matter. But longer term it will matter because if one property is sold there will be different consequences. Also there are advantages in borrowing as it will keep cash available for private expenses and will increase tax deductions if it is used for private expenses.


    Also there will be different consequences if properties have different owners. $100,000 withdraw from an investment property offset in the name of Spouse A v $100,000 borrowed by A and on lent to B.


    So think carefully before you go using offset account money.
     
  18. chylld

    chylld Well-Known Member

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    I only see an advantage if you're 100% sure you're only going to use the offset money for private (non income producing) purposes.

    If you're even 1% likely to buy any form of investment in the future, a separate IO LOC would be far more flexible, e.g.
    - capitalising IP expenses
    - buying shares and managed funds
    - buying IP3
     
  19. bythebay

    bythebay Well-Known Member

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    chylld, if I do use the funds for income-producing purposes eg: put it towards a deposit for another IP, the interest is still deductible right? [I recall something lingo about "it's the purpose not the source that determines deductibility"]
    or is it NOT deductible coz it's cash and not a loan

    thanks all again for your patience in answering my questions ....
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is unclear whether it will be deductible or not. Best to avoid parking in offsets is my advice.