The bank will approve a maximum loan amount against the property that secures the loan (generally 80% of the value).
You are free to draw this facility up and down at will.
It operates like an overdraft account and most often comes with a cheque book and debit card for ease of access to funds.
Interest only and have no term attached, which suits an investor as they are most often advised to get an Interest Only loan.
This loan could be used on the investment property.
These loans have a high level of flexibility in that you can park money in your loan when it is available and draw it as required without notifying the bank, as long as you stay within your approved limit.
Offset Account
Generally not a loan that an investor would use on the investment property, but rather on their family home to use in conjunction with their investment.
An Offset Account loan has a deposit account linked to the loan, the benefit is that any surplus funds that you might have, for example rental income, can be deposited into the deposit account and this is offset against the loan it is linked to.
For example, if the loan amount outstanding is $100,000 and there is $5,000 in the offset account the interest that is charged on the loan will be calculated on $95,000.
The effect this has is that the home loan gets paid out at a faster rate because your standard monthly repayment has been calculated on the full amount outstanding.
Offset Account loans vary in the amount that is offset, meaning that some lenders may offset only 50% of the funds held in the account whilst others offset the full 100%, so you need to pay attention to ensure you get the best loan for your needs.
Some banks "don't" offer the full 100% offset against your loan using an offset account and those that do may charge quite a high monthly fee to do so.
Then again a LOC is generally a higher interest rate to start with compared to a normal loan due to its flexibility, however usually the interest can be used as a deduction against your IP.
Personally I find a LOC better as u can reuse the same funds over and over without approval and when its sitting in your lOC......I find it less tempting to take out, as apposed to an offset account.
In the end they are much of a muchness, also with a LOC u can have your wages drawn straight to it each month or week, so while your wages are in the LOC, u are paying less interest on the overall loan.
