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An interest in advance home loan is usually an interest-only home loan with a fixed rate, which allows the borrower to prepay interest for the year ahead. By doing this they can obtain tax benefits and often, the lender will offer a discounted rate. Here's how it works and how much you can save.
As an investor, it may be suitable to take out a home loan that allows you to pay interest in advance on your investment home loan.
With these loans, you usually pay the interest for the year ahead in advance. For instance, in June 2022, you might pre-pay the interest that will apply on your home loan for the next 12 months, meaning you've paid interest in advance until 30 June 2023. This means you can claim the tax deduction in the 2022 financial year.
If you made a capital gain that financial year (for instance, you sold an investment property for a net profit of $100,000), pre-paying $20,000 worth of investment loan interest could help offset the capital gains tax payable. Instead of being charged CGT on $100,000, you'll only be charged on $80,000.
Some lenders also offer discounted interest rates to borrowers who pay their interest in advance as an incentive. For example, Westpac currently offers a 0.20% p.a. discount for interest only in advance home loans.
On an investment loan worth $600,000, this discount is worth $1,200 per year.
Note that this type of arrangement is only allowed on:
George is looking for a fixed rate interest-only investment loan to buy an investment property. He was going to apply for a 5-year fixed rate home loan at 3.5%, until a co-worker told him he could save some money and obtain tax benefits, if he could afford to repay the interest on his loan in advance.
He was in a position to pay interest in advance, so he found a home loan with a discounted interest in advance offer of just 3.3%. Based on a loan amount of $600,000, he saved $1,200 instantly by paying the interest in advance. Because he paid all of his interest at once, he was also able to make an immediate tax deduction in this financial year.
As with other fixed rate loans, if you repay the loan early for any reason (including refinancing and selling the property), you may have to pay break fees.
Also, you should be able to get a refund on some of the interest that you have pre-paid, pro-rata based on the period of the loan that you repay early.
While getting a 10-year fixed rate home loan might be a good idea if you want to keep your repayments the same over the next decade, you will pay more if interest rates drop.
Thirty year fixed rate home loans are a great way to lock in a great interest rate for the entirety of your loan but Australia doesn’t currently offer this lengthy loan option.
If you are looking to invest or you want to reduce your repayments, you may want to compare fixed rate interest-only home loans.
The secret to minimising interest on a fixed rate home loan.
Early repayment adjustment, also known as a break fee, is charged when you end a fixed loan contract. Learn how banks calculate these fees.
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