Debt Recycling and IP LOCs

Hi,

We have a PPOR with 190k owing, and an IP with a LOC we currently pay all IP running costs, including the mortgage out of.

We are sorting ourselves out to debt recycle through an offset account attached to our PPOR, as has been discussed in many threads here. I understand the first part, putting all income into the offset, and then drawing out the equity through repaying the PPOR loan.

I am confused about how to use this in conjunction with a LOC for running costs with a negatively geared property. Currently, we have been putting rent and tax return for this property straight into the IP LOC.

If this income goes into the PPOR offset instead, how exactly does it end up back in the IP running cost LOC? For example, after year one, we put 25k rent and tax in the offset, reduce the PPOR loan to 170k, and what happens to the 25k then? We need this back in the existing IP LOC to cover costs, as our LOC after one year no income gets close to maxing out. We do not want to increase the IP LOC, just add funds. I seem to be missing something pretty basic in my thought process, would really appreciate someone who uses debt recycling explaining what I am missing!

Thanks very much.

 

Hi Tulip,

Welcome to the forum.

In my understanding having the money in the PPOR offset is not going to help you in terms of debt recycling (there was a recent thread where Simon and I discussed this very point - http://www.invested.com.au/80/offset-account-16287/
You need to take money out of the offset and pay off some of the PPOR mortgage principle. Then set up an LOC (equal to the amount you have just paid off, or more if there is extra equity) with your PPOR as security, and use this to continue servicing the IP costs. So your first LOC will just remain maxed out, and you will start drawing down on this new LOC.

Someone will correct me if I have missed something.

John.

 

it could work with a portfolio loan, (such as st george and i think westpac) that way you can put money into the offset account and borrow it via another account for the tax deduction (you must stay within your original limit though until it gets revalued)

 

Thanks Johnny and Dave,

I guess I should add that the IP LOC is held against the PPOR, and both are held by the same bank. If, after 6 months for example, the PPOR mortgage reduces by 25k, I guess the LOC would just extend by 25k, otherwise I would end up with many LOCs very quickly.

Is there anyone who debt recycles with an IP LOC and PPOR, and if so, how often do you perform the recycle (or under what conditions?).

Cheers,

Tulip