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Interest in advance for a variable rate loan

Discussion in 'Finance & Banking' started by mannit, 17th Apr, 2010.

  1. mannit

    mannit New Member

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    22nd Dec, 2007
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    Location:
    Sydney, NSW
    Hi

    I want to know if one can pre-pay interest in advance in case one has a 100% variable rate interest investment loan.
     
  2. Superman

    Superman Well-Known Member

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    Location:
    Gold Coast, QLD
    Check with the loan provider.

    It may be a feature of a loan - depends on the type of loan and what it is for. I know that some investment loans it is quite common - not so much for property loans for my knowledge.

    SM
     
  3. mannit

    mannit New Member

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    Location:
    Sydney, NSW
    Interest in Advance on Variable Rate Loan

    The bank insists that I get a fixed rate loan. Is it not possible to pay a lumpum amount in the variable loan account and treat it as prepayment of interest ?
     
  4. GregR

    GregR Reid Consultants

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    Location:
    Berwick Vic
    Mannit,
    I have not heard that a bank insisting on a fixed rate loan. Go to another lender unless you want a fixed rate loan. The only reason I can think why a lender will insist on this if there is an issue with showing income serviceability and sometimes a fixed rate will get you over the line where a variable rate will not.

    Most lenders are happy you prepay and some offer discounted rates if you do prepay interest or in advance. It will depend on the loan contract. You want to make sure it is treated as an interest payment and not a principal repayment.

    I presume you want to do this for tax benefits. There are restrictions of the forward period (up to 12 months) that you can claim (check with your tax accountant) and you then run into an issue of what do you do the next year. You may be locking yourself into a cycle of having to prepay each year unless you manage your income and expenses so that it benefits you otherwise.

    Greg
     
  5. Billv

    Billv Getting there

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    Anything is possible but what's allowed is a different story.

    In this instance it looks like your lender won't allow it on this loan product.
    It could be that their business software does not facilitate it, and therefore their staff can't choose this option for this particular loan type.

    Not much you can do other than to change loan type or change lender
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The problem is likely to be related to the fact that the amount of interest you pay may change over the course of the period you pre-pay the interest for. The accounting for this may become complex in situations like an interest rate rise, or a change in the loan balance.

    However, I would challenge you to consider why you would want to pre-pay the interest.

    The only reason I could think of is to bring forward some of your expenses to minimise your income this year for tax purposes.

    Note that in order for the ATO to allow this, you would need to be getting some kind of commercial benefit (not just a tax benefit) from this arrangement. Typically you'll find interest rates on pre-paid amounts for fixed loans to be at least 0.1% cheaper, thus justifying the commercial benefit. This is unlikely to be the case for a variable loan arrangement and so you may run into problems with the ATO if you go down this path.

    If your goal is something other than tax minimisation, then I ask even more strongly, why on earth would you want to do this? Get a 100% offset account if you can and put the money into that. This will get you a far greater benefit.