Home Loan Rate – Australia

An interest in advance loan enables you to pre-pay the interest of the loan for the following financial year. These are available from a number of different lenders with fixed rates for a period of up to 5 years.

As a borrower there are two benefits you can receive; rate discounts and tax deductions. The first is a discount on the interest rate as the lender has your payments earlier.

In some cases the lenders will allow the rates to be fixed for longer which is beneficial in a period where they are rising.

Tax deductions are the main reason people opt for interest in advance loans. Paying the sum before the end of the financial year allows investors to reduce their taxable income for that year and therefore pay less tax.

1. Who can apply for a loan?

Generally these loans are only available to investors, and to people who switch to a fixed rate when refinancing their mortgage. If your loan is not tax deductable there is a far smaller savings benefit and therefore little reason to pay your interest in advance.

2. How much can I borrow?

Most lenders are willing to loan up to 80% of the property value (80% loan to value ratio or LVR). This is especially true if you are also borrowing funds to pay the interest in advance.

With LMI (lenders mortgage insurance) however you may be eligible to borrow up to 95% LVR.

3. How much can I save?

As mentioned above this type of loan has two types of savings;

• Discount interest rates: Generally you can save between 0.15% and 0.20% off your rate.
• Tax deductions: If you own an investment property or are refinancing, you should be eligible to apply for tax deductions. Paying your interest in advance therefore lowers your taxable income for the current year. This means you pay less tax. How much you save depends upon how much you can deduct.

4. You can borrow to pay the interest.

As lenders require you to pay in advance, you are unable to proceed if you cannot supply these funds. Some lenders therefore will allow you to borrow the funds to pay the interest for the following year.

By doing this you free up your funds for other purposes, however you must make sure that the tax and interest rate savings you have on your loan outweigh the cost of borrowing the payments.

5. What are the disadvantages?

Unlike with other types of loans the additional repayments you may make on the loan are restricted. It can also be difficult to get features such as redraw, 100% offsets and portability.

6. Where can I find more information?

Not all banks and lenders allow you to pre-pay the interest on your loan. Mortgage brokers that work with many different lenders and specialise in areas such as interest in advance home loans will know their lending policies. Thy will be able to guide you in the right direction and find you a lender with which you have the best chance of being approved.

It is also important to speak to your financial advisor such as an accountant or taxation agent. They should be able to give you a good idea whether this type of financial product will suit you and your taxation requirements.

When you apply for a mortgage, your lender will calculate the Loan to Valuation Ratio (LVR) of your loan. This is an important part of their assessment criteria. The higher your LVR, the higher the risk to the bank in the event that you default on the loan.

The LVR is a simple formula based on the loan amount divided by the value of the property. It is expressed as a percentage. Please note that in most cases the purchase price of a property and the bank valuation will be the same, however if there is a difference then the bank will use the lower of the two to calculate your LVR.

Example LVR calculations

If you are applying for a mortgage of $250,000 on a property valued at $300,000 then your loan will have a 83.33% LVR. This is calculated as 250000 / 300000 * 100 = 83.33. In this example you may need to pay LMI as your loan is for more than 80% of the property value.

As another example, if you are buying a property off of a family member and the purchase price is $500,000, the value may be slightly different as this is an off the market transaction. If the bank’s valuer worked out the property to be worth $600,000 then the lender will use $500,000 in their LVR calculation as it is the lower of the purchase price and valuation.

If you needed to take a loan of $450,000 on the above example then your mortgage would have a 90% LVR. This is calculated as 450000 / 500000 * 100 = 90.

Please note that some lenders can use the actual valuation rather than the purchase price, however this is rare and you must be in a strong financial position.

You can use this LVR calculator to work out the LVR for your loan.

When does LMI apply?

Lenders Mortgage Insurance will apply if your loan is over 80% of the property value. You can use this mortgage insurance calculator to work out how much your premium would be.

The banks get insurance on your loan if you borrow over 80% LVR because there is a significant chance that they will lose money if you are unable to make the repayments. The LMI premium is charged to you, the borrower. The higher your LVR & loan amount then the higher your LMI premium will be.

Not every lender has the same LMI premiums, they may use different insurers and some have discounts or LMI waivers available for their best customers.

What is the Base LVR & Final LVR?

Some lenders may allow you to add your LMI premium to your home loan. For example if you are borrrowing 95% LVR and your LMI premium was 2% of the loan amount then the lender may actually give you a loan for 97% LVR.

This is known as LMI capitalisation, and is not available from every bank. The base LVR is the LVR of your mortgage before the LMI premium is capitalised, in this case the base LVR is 95%. The final LVR is the LVR after your LMI premium has been capitalised, in this case the final LVR is 97%.

Find out more about LVRs

If you would like to learn more about the LVR of your home loan then refer to this page on LVR by the Home Loan Experts. They are specialist mortgage brokers and they can assist you with any further questions.