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Accessing funds in a LOC and an offset account???

Discussion in 'Investing Strategies' started by jscott, 20th Mar, 2006.

  1. jscott

    jscott Well-Known Member

    Joined:
    10th Jan, 2006
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    143
    Location:
    Perth
    In Steve's various forum posts and articles regarding the LOE strategy several times mention is made to extracting the funds out of a LOC and placing it into an offset account, in which case no interest would be payable (the purpose being to use it as your safety buffer)...

    Can someone pls explain this for me... I can't see the difference between just leaving it in the LOC or extracting it and putting it into an offset account?

    Is it something to do with the fact that if the banks changes its lending policy they may reduce the size of your LOC if you haven't used all the funds? :eek:
     
  2. Rolf Latham

    Rolf Latham Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
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    Location:
    Gold Coast and Sydney
    Hiya

    Conceptually there is no difference, but..................

    The term LOC here is used here in a slightly weird way.

    LOC normally is a revolving line of credit product, that has a fixed end term of say 30 years, AND in many cases is reviewable on an annual or other regular basis.

    A term loan that pulls loose equity is commonly also referred to as a LOC.

    In fact, a term loan used for this purpose tends to instead be a product with a 5 10 or 15 year IO period and thence attached to a "proper" offset acct, acts as a defacto LOC. That has two possible advantages.

    One, no annual or less regular reviews, and often no "repayable on demand" clauses.

    Two, higher LVRs, where with many LOCs we are limited to 80 or 90 %, with this de facto structure you can go as high as 95 % + lmi.

    Ta
    rolf
     
  3. jscott

    jscott Well-Known Member

    Joined:
    10th Jan, 2006
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    Location:
    Perth
    okay thanks Rolf - so for all instensive purposes no real difference...