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Prepaying interest on IO investment split of home loan

Discussion in 'Accounting, Tax & Legal' started by Toni, 21st Jun, 2009.

  1. Toni

    Toni New Member

    Joined:
    21st Jun, 2009
    Posts:
    1
    Location:
    Brisbane, QLD
    I have a standard home loan my PPOR which I have now split - one subaccount for the PPOR (P and I) and one for investing in shares (interest only). I keep the investment split strictly for investing. My loan provider does not provide a facility for pre-paying interest for next financial year on the investment portion.

    If I were to, say, simply prepay a year's worth of interest, would this be tax-deductible, or would it be considered as as payment of principle? There is the option of offsetting this payment against future fortnightly payments, but I still think this would just reduce the principle and effectively then capitalise the interest for the next year or so. Maybe I am on the wrong track?
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    I think you would have to check with the lender.

    I believe the additional payment would just go against the principle of the loan unless the lender has the pre-payment of interest facility.

    Maybe some of the investment gurus can help out on this one?

    SM
     
  3. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    If the facility is available, generally you are required to fix the rate for the following year for a small (deductible over time) fee.

    If you are borrowing to prepay this interest, and even capitalising the interest on this amount then get some Taxation Law advice beforehand. If this requires a private ruling you could have missed this financial year with the delay.

    You really do not want your financial affairs to appear too similar to either Hart's case or Fletcher's case.

    Cheers,

    Rob