For the Property Investor – Advance your interest
HOW CAN PRE-PAYING INTEREST BE OF BENEFIT TO ME ?
AND
MORE IMPORTANTLY HOW DOES IT WORK?
Lets deal with the second first. Very simply it means that you prepay 12 months of interest on your loan in advance. So towards the end of the financial year, for example BEFORE the 30th June 2008 you will pay 12 months of interest in advance, taking you to the 30 June 2009. So you have pre-paid next years interest and can now claim it as a deduction the current financial year. So in July, investors who are eligible to do so can get back some of that interest back in the form of a tax deduction.
You can’t just do this with any loan you have, when the loan is negotiated or applied for, you need to ask your broker for an ‘interest in advance loan’.
An interest in advance loan is similar to ‘fixed rate, interest only standard residential home loan’ EXCEPT you pay the interest in advance.
Some lenders will also offer interest in advance frequency options such as yearly, half yearly, quarterly and monthly – thereby spreading the payments over a period of time.
WOW – why would you do that? Well this brings us to the first question. How can this benefit me?
While the initial outlay may seem great many investors are simply unaware of the tax and interest saving strategies this gives them.
Prepaying your interest is a way that you can achieve a discount from your lender you can also accelerate the tax deductions that come from this expense by bringing them in to the current financial year.
Some banks offer around a 10-20 basis point discount. In fact last year one of the leading banks offered a 30 point discount on the usual fixed rate investment loan.
As we have already established these types of loans do not differ much from the standard fixed rate, interest only residential home loan’, this means the loan is fixed for a certain period of time usually 1 3 5 10 15 years. At the end of the ‘fixed’ period though the loan must be repaid in full or renegotiated. This is the case for all fixed rate loans whether they are interest in advance or not.
There will be significant early repayment fees for discharging the loan before there fixed term has expired although by fixing the rate you get some certainty in these difficult times. It is also worth pointing out that these loans do not have all the features of a standard home loan. The most important one to remember is that there are no access to funds by way of redraw. It is however possible to split your loan – thereby getting a fully featured loan on part of your loan. The usual minimum is $30,000.
These loans can definitely be of benefit but a healthy cash flow and strict savings plan are needed to meet the interest payments. As always you should consult your accountant or finance professional before making any financial decision as individual circumstances differ. We also recommend that you get information about the new tax guidelines from your accountant or logon to www.ato.go.au
Tags: Loan, prepaid interest