An Interest in Advance loan could be just what property investors need to make the most of available deductions.
The tax season is upon us and for investors, that usually means hunting around for every available deduction. One of the most popular options is an Interest in Advance loan. Interest in Advance loans are like most standard fixed-rate, interest only loans but with one key difference: depending on their individual circumstances, borrowers can pre-pay the next year’s interest before the 30th of June and claim it as a tax deduction in the current year, where the underlying loan purpose is for producing income.
Why should property investors pay Interest in Advance
Eligible investors can effectively get part of their interest back in the form of a tax refund. Interest in Advance loans suit property investors who are eligible for a tax deduction on the interest incurred. What investors are effectively doing is bringing forward up to a year’s worth of interest to an earlier financial year so the deduction occurs sooner.
Lenders typically offer a discounted rate, often around the .10% to .15% mark, which on a $300,000 loan results in an interest saving of $300 to $350 per year. The discount offered is not really enough to encourage most people to pre-pay their interest and once the time value of money is accounted for, the savings diminish even further.
However, it could be beneficial to pre-pay your interest depending on other financial activities that have occurred in this financial year. Being able to claim 2 years of interest on your investment debt in the one financial year might save you a significant amount of tax, which is why if you have investment loans you should be talking to your accountant or financial adviser now about the best way forward.
While loan features vary between lenders, Interest in Advance loans generally offer a fixed rate of interest and terms of one to five years. Depending on the institution, interest can be paid in advance monthly, quarterly, six monthly or annually. Because it is an interest only loan, borrowers must pay out the loan at the end of the loan term or roll it over into another loan. It may be possible to split the loan and make extra repayments.
What are the drawbacks
There are also important limitations borrowers should be aware of. The most important is the requirement to pay a fixed sum of interest (often $10,000 or more) at a set time each year, quarter or month. For this reason, Interest in Advance loans suit investors with a healthy cash flow or those with good savings habits.
Borrowers may also be hit by early repayment fees should they wish to pay out the loan before the end of the fixed interest term. Investors should remember that because these are fixed rate loans, there is a trade-off with reduced flexibility. You cannot make unlimited additional repayments and there may be early repayment costs. On the plus side, investors get to lock in their interest rate, giving them certainty over repayments for the life of the fixed term.
Warning: The content of this article (The benefits of Interest in Advance for property investors) provides General Advice about Interest in Advance investment loans. It does not take into consideration your specific personal or financial circumstances, needs and objectives and is not a specific recommendation. We recommend that you seek independent financial advice about the tax benefits or implications of Interest in Advance investment loans.