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  1. #11
    Join Date
    Feb 2013
    Posts
    339

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    You need to structure it accordingly with entities.

    both home and rental in trust is also risky.

    See a professional

  2. #12
    Join Date
    May 2012
    Posts
    398

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    Quote Originally Posted by DaveW View Post
    An offset account can be convenient to have but when the tide turns and banks tighten on lending then you will wish you had not put the cash in with the same bank as your mortgages. Banks can decrease your offset limit on a whim. During hard times cash is king and needs to be protected
    You are correct if you are talking about revolving credit.

    Offset mortgage (as offered by BNZ and Kiwibank at least) are NOT revolving credit.

    It works like a regular mortgage where interest and principal payments are made each month. The cash you have sitting in an offset account reduces the interest accrued each month, but you still have scheduled monthly payments and when the interest portion of the payment goes down, the principal portion goes up.

    That is not the same as a revolving credit, where you put all money into the mortgage itself, reducing the balance so less interest is charged each month, but revolving credit mortgages don't have fixed monthly payments whereas offset mortgages do.

    You shouldn't use revolving credit mortgage for rental properties because each time you 'pay down' the mortgage (eg when your salary comes in), but then 're-draw' the mortgage to pay for daily bills (eg the power bill), the IRD consider the portion used to pay the bills is now not for the purpose of financing the rental property, and so you now can't claim the interest back on this portion of the loan as an expense against your rental income. As more and more months go by, the proportion of the outstanding loan that is still used for the purpose of financing the rental property will decrease, even if the total amount owing on the revolving credit mortgage has not reduced by much.

    Offset mortgages do not have any of these problems.

  3. #13
    Join Date
    Apr 2004
    Location
    Auckland
    Posts
    1,895

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    Keep LOC account separate.
    Deposit all the rents into it.
    Keep a separate personal account for salary, living expenses.
    Then LOC works just fine - till you see the next nice shiny thing to buy...
    The three most harmful addictions are heroin, carbohydrates and a monthly salary - Fred Wilson.

  4. #14
    Join Date
    May 2012
    Posts
    398

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    Sure, but it means your personal money won't reduce the interest you are paying on your rental mortgage.

    Offset mortgages let you do that, but don't taint the interest deductibility of the loan. The only downside is that they can't be interest-only, but that's it.

  5. #15
    Join Date
    Apr 2009
    Posts
    899

    Default

    You're right about the benefits of offset mortgage over revolving credit type, however my comment still stands. If you don't put your cash in a separate bank/investment then in an economic downturn the bank has the right to use the money in your offset account to reduce the limit of your mortgages.

  6. #16
    Join Date
    May 2012
    Posts
    398

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    Quote Originally Posted by DaveW View Post
    You're right about the benefits of offset mortgage over revolving credit type, however my comment still stands. If you don't put your cash in a separate bank/investment then in an economic downturn the bank has the right to use the money in your offset account to reduce the limit of your mortgages.
    You mean confiscate cash out of your account to pay down your mortgages?

    A revolving credit mortgage may start at $50,000 owing and then you pay down to $30,000 owing and have $20,000 "head room" that you could withdraw again later. The bank can close off that $20,000 head room at their whim.

    Offset mortgages do not have such a limit. If it starts off at $50,000 owing, and you have $20,000 cash sitting in your offset account, you still owe the bank $50,000 they are only calculating interest on $30,000 of it. To "reduce the limit of your mortgages" as you are suggesting would require them to confiscate the $20,000 cash your have and use it to pay off the mortgage directly. Yes, there's nothing stopping a bank from doing that, however reducing a revolving credit limit (or overdraft limit, or credit card limit) by $20,000 is very different than literally confiscating $20,000 cash. What I'm saying is, for the bank to start raiding your cash deposit in this way, the shit would really have to have hit the fan.
    Last edited by Lanthanide; 12-06-2019 at 05:42 PM.

  7. #17
    Join Date
    Apr 2009
    Posts
    899

    Default

    Yes you have it right. When the shit hit the fan, like it did 2009, the banks will reduce their exposure by shifting your deposit to pay down mortgage. The property owner may then decide to liquidate.
    Meanwhile the person who has deposited to separate bank will be in a position to buy.

  8. #18
    Join Date
    May 2008
    Posts
    3,528

    Default

    Quote Originally Posted by Lanthanide View Post
    You shouldn't use revolving credit mortgage for rental properties because each time you 'pay down' the mortgage (eg when your salary comes in), but then 're-draw' the mortgage to pay for daily bills (eg the power bill), the IRD consider the portion used to pay the bills is now not for the purpose of financing the rental property, and so you now can't claim the interest back on this portion of the loan as an expense against your rental income. As more and more months go by, the proportion of the outstanding loan that is still used for the purpose of financing the rental property will decrease, even if the total amount owing on the revolving credit mortgage has not reduced by much.
    Something similar to this cropped up a few months ago on PT.
    I was thinking along the same lines as you - the purpose of the loan was important.
    However, I was corrected and I learnt something new.
    The IRD fine print:
    Quote Originally Posted by Artemis
    Check out IR264 page 11 et al.
    I could be wrong though.

  9. #19
    Join Date
    May 2012
    Posts
    398

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    Quote Originally Posted by DaveW View Post
    Yes you have it right. When the shit hit the fan, like it did 2009, the banks will reduce their exposure by shifting your deposit to pay down mortgage. The property owner may then decide to liquidate.
    Meanwhile the person who has deposited to separate bank will be in a position to buy.
    Right, but there's also nothing stopping the bank recalling the loan, or a portion of it, requiring you to take your cash from the other bank to pay the recall demand.

    Really it's a spectrum of actions the bank can take to reduce their exposure, in order of ease for the bank and therefore likeliness to occur:
    1. Reduce/remove any revolving credit, overdraft or credit card limits
    2. Take cash on hand and use it to reduce mortgage balance
    3. Recall the loan and demand payment or fore foreclosure


    There's not a great deal of difference between #2 and #3 - just in the case of #2 the bank doesn't need your express co-operation first. There is quite a big difference between #1 and #2 though.

  10. #20
    Join Date
    Apr 2009
    Posts
    899

    Default

    They will only foreclose if you cannot meet the payments.
    If you lose your cash reserves then you put yourself at risk.

    The mainstream banks are most conservative, and they will look after their own business.
    As an investor you should be looking after your rental business just as vigilantly, and position yourself to profit from downturns by having cash on hand to purchase.

    It has been well advised already by many that you should separate your mortgages across different banks. I say it's equally advisable to spread your cash deposits and other investments.


 

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