27 May 2009

Is prepaying your interest beneficial to you?

You may not be aware that as an investor you have the option to prepay your interest and be rewarded with a rate discount by your lender.

For investors choosing to pay the next financial year’s interest in advance, some banks offer between a 10-20 basis point discount. In 2007 one of the major banks offered a 30 basis point discount on their standard fixed rate investment loan.

Prepaying next year’s interest could be appealing to the property investor as the deduction can be claimed in the current financial year rather than wait 12 months for the tax benefit.

It was particularly appealing last year because of the tax cuts introduced on 1 July 2007.

There is a second round of tax cuts being introduced on 1 July 2008. It may make sense for some investors to bring forward their deductions to a year when they are to be taxed at a higher rate. Your accountant will be able to help with the new tax guidelines, or alternatively visit www.ato.gov.au (rates, calculators and tools).

The discounted rates can be attractive but the ability to pre-pay interest is only suited to individuals with the cashflow to take advantage of the offer, not just this year but each year of the fixed rate period.

If you take out an interest-in-advance loan only to find that you haven’t got the funds to pay upfront in subsequent years, then you may be forced to refinance; however this may incur switching fees and break costs.

Ideally investors should start thinking about restructuring their affairs after Easter, rather than leaving it until June. This will allow time to explore your best possible scenario with your broker and ample time to have your application processed.

We may see some offers again this year from the banks. If you are interested in investigating your options and want to be kept informed, you should call the office at your earliest convenience to allow us to work out the best solution for you.

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