LOC in a falling market

Discussion in 'Loans & Mortgage Brokers' started by bamute, 3rd Jun, 2018.

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  1. bamute

    bamute Active Member

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    Many housing markets around Australia are beginning to turn negative. Intend to pull equity from IP to invest in shares if there is a crash/dip.
    Is it best to organise a LOC now while house prices are high? Or wait until the share market pull back in a couple of years and then organise it when the IP (and LOC) is probably worth less?
    What happens to LOC's in a falling market. Do the banks automatically reduce the LOC limit? If the LOC is drawn, will the banks ask for a top up of funds?
    A LOC sitting ready to go for a market crash is a great idea. But a bank asking for an instant cash top up to a drawn LOC would be very difficult to deal with. Don't want to get caught!
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    We would . encourage equity locknut's using standard svr loans interest only with clean offset. Loc with many lenders is repayable on demand. Not a big ideA with a falling market and possible financial imposts.

    Risk management 101

    Ta

    Rolf
     
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  3. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    I would recommend a LOC from a tax point of view initially. When values are high it would be good.
    But once drawn convert it into a IO or PI loan.
     
  4. JasonC

    JasonC Well-Known Member

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    I’ve always been of an advocate of borrowing when you can because you may not be able to when you need to later.

    Jason
     
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  5. Anthony Brew

    Anthony Brew Well-Known Member

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    Are there any difficulties with converting LOC to a standard loan for the same amount?
     
  6. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Generally not.
     
  7. euro73

    euro73 Well-Known Member Business Member

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    Cash out is probably going to be the next victim of the lending changes. If you want to get cash out - better get a wriggle on...
     
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  8. Fargo

    Fargo Well-Known Member

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    Get the LOC while you can. You don't have use it . Nothing should happen if the market drops unless it looks to the bank that you are squandering money if you have increased you asset base this will be taken into consideration . Are you going to buy the market? I doubt they would ask for a top up unless you go over the limit, they may reduce the limit but if you bought shares you could always sell some shares. I think it is a dumb idea waiting for the market to collapse. But it is imperative to have funds available when those 4x a decade buying opportunities suddenly present themselves. The really good bargains sometimes are gone in days or hours you need to have funds available to make unconditional offers for property. Individual share often collapse for no good reason on a contagious over reaction on insignificant news. Wouldn't you have liked to buy BAL for $4.00 a year ago for $4 now 17, or AMI for 1c now 63. Don't wait for a share market to collapse to buy shares you might be waiting a long time and I don't think you should buy the market, buy good solid companies with good fundamentals with high growth potential, the companies that you want to buy, might not even fall when the market is collapsing the better ones may rise as money flows to safety .
     
  9. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Banks sometimes cancel a LOC if not used.
     
  10. Corey Batt

    Corey Batt Well-Known Member

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    The concept you've noted is sound - the issue others have noted is using a LOC specifically. LOC's unlike standard term loans can and are much more likely to be called in with the lender.

    This happened to a significant amount of borrowers during the GFC and there's a few anecdotal examples that I know which caused the borrowers significant strain, than otherwise would have happened under a normal term loan environment.

    Pull out equity with the right lender and product, then you can leave it there for a rainy day or if the right opportunity arises.

    You'll find that some texts/sources will reference LOC's for any equity release/additional loan, especially older dated sources. This is more to do with the previous popularity of LOCs, especially pre current loan products which have broader features allowing the same functionality of LOCs at lower cost, more flexibility and greater protection.
     
  11. bamute

    bamute Active Member

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    LOC's are quite dangerous then? Would not be happy drawing funds to purchase and then being forced to sell with the tax implications. Almost work like margin loans did during the GFC if there was a downturn.
     
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  12. Athikalaka

    Athikalaka Well-Known Member

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    I've always been confused with my LOC as other LOC rates I've seen from other lenders are high and mine always matches the lender's home loan rates. They no longer sell their LOC product so I always watch their home loan rates.

    Connective Home Loans (through Macquarie Bank) - anyone aware if this product (at the time) had clauses to call in on demand? I'm trying to look through my contract and can't find anything that states this or just the fact it's called "Line of Credit" is a given that it can be called in at anytime?

    This is one of the factors why I have looked at AMP's Master Limit but with Connective I'm not paying any ongoing fees for a very competitive rate.
     
  13. Eric Wu

    Eric Wu Mortgage Broker Business Member

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    why not releasing the equity and using a standard IO loan with 100% offset ?
     
  14. Natedog

    Natedog Well-Known Member

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    It’s exactly what we are doing now, did a reval and refinancing up to 80% then dumping the excess into our offset against our PPOR. Better to have the access to it when or if we need it than wait and not be able to in the future.
     
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  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Obviously that offset linked to the PPOR is a clean offset with NIL savings or income in or out of it ?

    Otherwise you could end up like Ms Domjan and be denied a deduction if ever you use the cash for investment purposes.

    Pls seek specific tax advice.

    ta
    rolf
     
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  16. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Tax mess. Hope you are not claiming interest.
     
  17. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Do

    Even if a clean offset it would mean interest not deductible
     
  18. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    That sounds badly structured - best get a review to make sure it's done correctly. If your offset had cash in it previously you'll need to do a bit of faffing to sort it out - how complex this is will depend on your situation and lender.
     
  19. Natedog

    Natedog Well-Known Member

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    Understand all good, not concerned really about the future deductibility of the interest of this cash out portion IF we use for investment... we aren’t planning to.... but who knows.

    It was more about gaining access to it now while we can still refinance to use if and how we want in the future.
     
  20. Natedog

    Natedog Well-Known Member

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    Not claiming interest for the extra equity cashed out portion, all good. Old deductible loan amount kept as one split, the extra equity portion kept as a non deductible split.... purely to access the $$$ while we can. My income can vary dramatically from year to year so safer to cash out when we are able to as a “just incase”