Loc vs cash out

What are your thoughts and why?

 

What is the question?

 

Question is what's the best way to access equity, refinance with cash out loan or Loc? Why would you use one over the other?

 

Personally I'm a fan off cash out, with offset account, putting as many expenses on 55 day interest free credit card and setting up an automatic payment out of the offset account for that credit card.

The credit card would preferably not have an annual fee, or be part of the home loan package (I'm a massive tight ass )

A few reason this is my first choice...
1. Lower interest rate
2. Less interest thanks to using the 55 day interest fee period
3. Depending on the bank you are saving on LOC fees

But it all depends on the individual situation (especially how sophisticated the client is, I have some guys who I don't trust with a credit card...).

Love to hear what others think

 

From a taxation point of view you don't want to be borrowing cash now, parking it in an offset and then using it later as you are risking the deductibility of interest. So my advice to clients, in most cases, is to get an LOC, or even better to get a term IO loan which can be used like an LOC - i.e. expenses paid directly from the loan account.

But the down side with a LOC is that these are often at call and they have a higher rate.

So use the IO loan which you can pay directly from first, if not possible then go for an LOC but once it has been used convert this to a term IO loan.

See my tax tip 1.

 

Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

Tax Tip 63: Don’t cause borrowed funds to take a detour Tax Tip 63: Don’t cause borrowed funds to take a detour

Tax Tip 67: Using Redraw Facilities on loans and Tax Issues Tax Tip 67: Using Redraw Facilities on loans and Tax Issues

 

@Terry_w great stuff in your articles, I normally get around any potential mixing issues by having a totally separate offset and credit card which is only for a single investment (and obviously the cash out is done in a loan split).

Should end up with the same result as the IO loan but a lot easier for the customer to use and will save on total interest expense.

 

but potentially dangerous from a tax point of view.