Interest in Advance – pre-paying interest for tax benefits

By Nicky Turano - Lending Specialist

Designed for property investors where the underlying loan is used for income producing purposes, Interest in Advance is a home loan feature that allows you to pay the interest on your investment loan as an upfront sum. So, as a borrower, you can pre-pay the interest for the coming year before 30 June and claim it as a tax deduction in the current year.

Tax refund

This means that upon lodging your tax return, as an eligible investor, you can effectively receive a portion of your interest back in the form of a tax refund. So what you are effectively doing is bringing forward up to a year’s worth of interest to an earlier financial year, so the deduction occurs sooner.

While the loan helps to maximise tax benefits Interest in Advance loans can also be helpful for budgeting and cash flow purposes particularly if you’re self-employed with variable annual income.

So let’s assume you’ve had a bumper year which will be very difficult to replicate in the year ahead. You have monthly interest payments of $1,000 on your investment property and because you’re flush with cash, on June 30 you can prepay $12,000 for the coming year. You could then claim this amount of $12,000 in the current tax year to lower the total amount of tax you have to pay for your bumper year. The following year of course, you would have no interest deduction and would have to declare the rent as income. However, as your income also declines markedly, you may also benefit from a lower marginal tax rate.

Fixed rate

The vast majority of Interest in Advance loans generally offer a fixed rate of interest which makes it easier for lenders to determine your projected interest costs – but it is possible to find variable rates. Depending on the lender, interest can be paid in advance monthly, quarterly, six monthly or annually.

While Interest in Advance loans offer tax benefits, as a borrower, there are also some limitations you need to be aware of. This includes the requirement to pay a fixed sum of interest (often $10,000 or more) at a set time.  So you can see you’ll need a healthy cash flow to be able to take advantage of Interest in Advance loans.

As most of these loans are fixed rate loans there can be restrictions on making additional repayments, or repaying the loan early.  As an investor you could be liable for early repayment costs.  On the positive side a fixed rate can give the investor certainty over repayments for the life of the loan.

If you’d like to know more about Interest in Advance loans, why don’t you give me and the finance team here at Countplus mbt a call. We’ll help you determine if such an investment loan would benefit your own particular circumstances.