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
What loans is it available with?
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
Who does it work best for?
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
When should you apply
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%
Other things to know
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
Rate Lock Fees
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.
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