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Confused over mortgage features

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| 28 Mar 2011, 09:52 PM Agree 0

what's the difference between a LOC and an offset mortgage? Which is better for investing?
  • Smartline Chiswick | 29 Mar 2011, 04:57 AM Agree 0
    Hi New Investor,

    A line of credit is essentially a limit that is set by the bank at the time of application that allows you to draw up to that limit during the life of the loan. It normally operates as interest only for the entire life of the loan and is great if you need cash flow at certain times eg for minor renovations. It generally has a higher interest rate than a comparable offset mortgage and this can vary between lenders but is typically around 0.15% higher.

    An offset mortgage on the other hand is the standard mortgage type linked to an offset account. If you have a large amount of funds available you can leave these in the offset account meaning that you only pay interest on the difference between the offset balance and what you borrow, not the whole loan balance. If you have this type of loan arrangement it is normally done under an interest only arrangement for investing and can be done for a period of 5-10 years after which it either goes to principal and interest repayments or gets renegotiated (although who has a loan that lasts more than 10 years these days!).

    As for which is better for investing it really depends on your individual needs and what your plans for the future are. Some of my clients do a small LOC facility in conjunction with a standard loan so they get the benefits of a cheaper interest rate for the bulk of their funds along with the flexibility of a LOC. It's also worthwhile noting that you can potentially complicate things for yourself taxation wise if you use your LOC for non investment purposes but I'll leave that topic for the accountants on the forum.

    Hope that helps!


  • Herman | 16 Mar 2012, 06:40 AM Agree 0
    A line of credit usually allows you to make minimum monthly payments similar to the interest-only amount and the main variation from an all-in-one loan is that a line of credit has a highest possible credit limit.
  • JoemelY | 01 Aug 2012, 10:31 AM Agree 0
    An offset mortgage does what it says on the tin. It 'offsets' your savings against the total debt of your mortgage, so rather than earning interest on your savings, you pay less on your mortgage debt.
  • macarioleroy | 16 Aug 2012, 06:22 AM Agree 0
    You can withdraw the line of credit anytime, banks allow customers to make a decision on credit limit and that particular figure will be regarded as line of credit, where as offset borrowing is different from this phenomenon.
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