Lending
When people ask us this question, we ensure they understand how fixed rate loans work and the related pros and cons.
Most first home buyers will require Lenders Mortgage Insurance. It can cost a lot of money – is it a good thing or bad thing?
Property Investment
We find it best to try and explain it as simply as possible, and then demonstrate with an example.
If you understand the process upfront, this can be a worthwhile property investment strategy.
Upgrading
With the recent rise in the property market, we are getting this question more and more.
Interest in Advance Fact Sheet
A loan where you can ‘prepay’ the following year’s interest. If that loan is an investment loan, the prepaid interest is generally tax deductible in the year you paid the interest. Many lenders offer them and they are used regularly by property investors.
- You have an investment loan of $500,000
- You apply for a 1-year fixed interest in advance loan @ 4.5%pa
- On 28 June 2018 you pay $22,500 to cover interest from 1 July 2018 to 30 June 2019
- The $22,500 would be deductible in your 2018 tax return, lowering your tax bill or increasing your refund
Interest in Advance is available with Fixed Rate loans with Interest Only repayments. They are not available with variable loans, lines of credit or loans with P&I repayments as the lender cannot calculate the interest payable.
Whilst they are available for Owner Occupied and Investment loans, their features are more applicable to investment loans.
- Receive tax benefits in the current financial year
- Making one big payment in advance can be less stressful than making weekly or monthly loan repayments
- Good rate discounts available
- Good for cash flow planning
- The fixed rate can be locked in for 1-5 years
- Those in the top few income tax thresholds
- Those who feel they will have a larger tax bill coming in the 2018 tax year because of unexpected additional income
- Those who may be expecting the 2019 income year to be slightly lower than normal
You should start thinking about your ‘Interest in Advance’ strategy in April and have the application in with the bank in May. This allows plenty of time to be ready.
- You can get discounts of 0.15%-0.20% for paying the interest in advance
- This can often be combined with a ‘professional pack’ discount of 0.15%-0.20
- So combined discounts can be up to 0.40%
These are fixed rate loans, so the normal ‘fixed rate’ restrictions apply
- Additional repayments during the fixed term are generally not permitted
- Break costs may apply if you sell the property / payout the loan during the fixed term
- Rate lock fees apply – see below
This fixed rate may CHANGE between the time we recommend the loan and settlement. Some lenders apply the fixed rate on the application date, others when you are approved, others when the loan settles. If you want to LOCK IN the fixed rate we show you, lenders will do that if you agree to pay a RATE LOCK fee. Some lenders charge a flat fee, others charge 0.1-0.2% of the loan you are fixing.
Interest in Advance loans involve a change to your tax situation, so you should discuss their benefit to you with your tax and financial adviser.
