Interest In Advance Loans – 6 Things You Need To Know!
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.
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