What Is “Paying Interest In Advance?”
Paying off of an investment property loan “Interest In Advance” (IIA) is fixing your loan at a discounted rate for 12 months and paying the interest normally incurred throughout the year as one upfront payment.
Benefits of prepaying mortgage interest?
- Receive a significantly cheaper rate!!
- Cash flow and budgeting – utilise a lump sum available at certain times of year (for example a bonus), or simplify finances by making one prepayment of interest upfront rather than budgeting regular interest payments throughout the year.
- Locking in a fixed annual rate – protect yourself against interest rate rises for 12 months and receive a discounted fixed interest rate.
- Tax deductions – paying Interest In Advance may reduce your taxable income and therefore tax payable, potentially saving you thousands. It also changes the timing of a tax deduction, bringing it forward one year. The advantage is that you can claim a deduction for the expense in the current financial year.
Case Study
Bill has an investment property which will generate him $20,000 in income. He has a $300,000 loan in place with interest payable at 6% per annum.
He also earns $80,000 salary income every year.
The table below shows the savings Bill can generate by prepaying his interest. .
|
No Prepayment |
With prepayment |
||
| Salary income | $80,000 | $80,000 | |
| Investment Income | $20,000 | $20,000 | |
| Assessable income | $100,000 | $100,000 | |
| Interest deduction – 2011-12 | $18,000 | $18,000 | |
| Prepaid interest for 2012-13 | $18,000 | ||
| Interest rate | 6% | 4.8% | |
| Taxable income | $102,000 | $84,000 | |
| Tax payable | $26,800 | $19,370 | |
If you’d like to discuss whether paying Interest In Advance is appropriate for your situation please call the team at Tiffen & Co and speak to one of our friendly mortgage brokers. As highly qualified, multi award winning and experienced mortgage brokers, we can help you work out the best solution for your personal circumstances.
