Every lender has their own terms and conditions, and this is intended only as a general guide to understanding this topic. Contact us to discuss your individual circumstances.
If you have an investment loan, you may be able to choose to pay one year’s interest in advance. The interest rate is fixed for a 12 month period, and you pay the full year’s interest in a lump sum upfront.
✓You may be able to claim a tax deduction for the interest in the year that the lump sum was paid, bringing the tax deduction and refund forward a year.
✓Locking in the interest rate for the year, so any increase in variable rates won’t affect the loan repayments. (see disadvantages).
✓A single payment means consolidating multiple interest payments into one, simplifying your cashflow and budgeting.
✓Lenders may offer discounts on the interest rate.
✓You have to pay the full year’s interest in a single upfront payment.
✓Locking in the interest rate for the year, so any decrease in variable rates won’t affect the loan repayments. (see advantages).
✓If you repay the full loan or any lump sum before the end of the fixed rate term, the lender may charge you early repayment fees.
✓You can’t have an offset account linked to this style of loan.
✓If you switch back to paying normal interest, then there will no interest tax deduction in that year.
Things to consider
✓Check with your accountant whether paying 12 months interest up-front is a suitable tax-planning strategy for you.
✓Check with me to see if your lender offers an Interest in Advance option.
✓If you put the lump sum in an offset account or in your home loan, it could save you more interest, provide you with more flexibility and access to the funds.