Line of credit

Discussion in 'Loans & Mortgage Brokers' started by giraffez, 27th Mar, 2017.

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  1. giraffez

    giraffez Well-Known Member

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    I just want to understand this a bit more, I've been reading a few threads that mentions this. Once you have a loan, why would you look at a line of credit.

    Line of credit is essentially like a credit card isn't it? You can tap into borrowed funds up to a set amount when you need to?
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Instant access to borrowed funds for IP deposit (don't use it for non-investment purposes).
     
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  3. Xenia

    Xenia Well-Known Member

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    Personally I have opted not to have this anymore because it forces me to get creative and increase cashflow when I need it rather than knowing that there is a source available for me.
     
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  4. giraffez

    giraffez Well-Known Member

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    Whats the difference then to a loan then?
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    It is a loan secured by the property.

    You may be able to set up several LOC for different purposes so as not to contaminate your loans.
     
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  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    LOC is generally ( but not always) evergreen ( io for 30 years)

    But is generally also "repayable" on demand

    Not great for hard long term debt

    useful for capitalising interest in some scenarios

    ta
    rolf
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The main reason to use a LOC is for tax reasons.

    With term loans they generally have to be paid out somewhere at settlement. That runs the risk of making the interest not deductible where the borrowed funds are parked in an account.

    What I do for clients with some lenders is to set up a LOC use it and then convert it to an IO term loan.

    But this is getting harder to do now with the credit squeeze.
     
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  8. Corey Batt

    Corey Batt Well-Known Member

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    It's just a different type of loan. You'll generally pay an increasingly higher interest rate and take the risk of the loan being called in at any time. I can see this type of facility going the way of the Dodo in the long term. There's quite a few term loan options which can actually replicate the facility.

    Effectively it's a loan account wherein you can pay it down to $0 and have the full amount available, transact in and out of the account etc. With the progressive updating of features of normal term loans with offset accounts, direct debiting from accounts with some lenders this has made them an expensive redundant option for a lot of cases.
     
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  9. Propertyman

    Propertyman Well-Known Member

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    Hi guys, does a line of credit increase with every principal payment?

    For example, if you have a $100k line of credit and a $400k PPoR loan balance - if you pay $20k off the $400k in a year, does your line or credit automatically increase to $120k?

    Thanks
     
  10. Phantom

    Phantom Well-Known Member

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    No. If you have a $400k PPOR loan balance and you pay it down $20k, the balance is $380k and your LOC is still $100k. In theory, you may have increased your borrowing capacity by paying down debt, but I wouldn't say it is dollar for dollar. That is - your capacity 'may' theoretically be more, but not by the exact amount you reduced your PPOR loan. In addition, it wouldn't be automatic. You would need to request an increase which may or may not trigger a full assessment.
     
  11. Propertyman

    Propertyman Well-Known Member

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    Thanks @York so when people like Peter Thornhill in his debt recycling strategy say to get a flexible line of credit so that you can draw additional amounts as your mortgage reduces - how would they do it?

    Thanks
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think he means a LOC that can be drawn down in stages.

    As the non-deductible debt is paid down the LOC is periodically increased and the process repeated.

    With lenders such as AMP under the master facility it is possible to decrease one loan and increase another without triggering a credit assessment as long as the limit is not exceeded.
     
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  13. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    A line of credit is really just an expensive 30 year interest only loan with transaction capability and no offset account.

    It sounds like a good way to get a long term interest only loan but it comes with significant risk of having the balance of the loan (extra payments) cancelled at will by the lender. This hasn't occurred much in the past, but I can see this happing a lot more in the future due to APRA crackdowns.
     
  14. Propertyman

    Propertyman Well-Known Member

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    Thanks @Terry_w yes that's what I'm talking about
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  16. Propertyman

    Propertyman Well-Known Member

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    I have @Terry_w. is that the same as a line of credit?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not it is a facility. Under that you can have various products and you can change from one product to another. This is good because you can draw down the LOC and the convert it to a IO loan and get a lower rate
     
  18. Propertyman

    Propertyman Well-Known Member

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    Thanks @Terry_w that definitely sounds like a better option
     
  19. thatbum

    thatbum Well-Known Member

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    A line of credit has been immensely useful for me as someone who uses it to fund renovations and furnishings as I go. Its only been a touch more expensive than a normal IO loan, and the LoCs that I finished using, I got converted into a IO loan at the end.
     
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  20. Phantom

    Phantom Well-Known Member

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    My understanding is the same as that of @Terry_w. It's done progressively. So over time, as you pay down your PPOR loan, you increase your LOC to use further for debt recycling.
     
    Last edited: 8th Jun, 2017
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