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Prepaying Margin Loan Interest

Discussion in 'Accounting, Tax & Legal' started by Alan, 3rd Mar, 2006.

  1. Alan

    Alan Well-Known Member

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    Nick,

    Can you(or others :) ) comment on the relative positives and negatives of doing this?

    Obviously this will be different for various individuals, however I'm sure there are some general comments that might also be useful.

    Ok.......I'll get the ball rolling.......

    Why would you want to prepay the interest?

    For some I would think it may be advantageous to possibly incur some additional tax deductible items in a particular year to offset other income. This may well vary from year to year but may be used as a 'balancing tool'.

    Prepaying interest usually qualifies for discounted rates, however I guess you have to examine the discount you are receiving against the lost 'opportunity cost' ie. by investing the money up front and having it working for you it may be possible to get an overall better return than the benefit from the discount.

    Indeed, when you actually look at the interest rate deduction for pre-payment, how much of an incentive is it if the money is actively invested for investments during the period anyway?

    This is just quickly off the top of my head and I'll have a play around with some actual figures when I get a chance.

    Any other comments about prepaying the interest?

    NB. Let's leave Capitalising the interest as a separate question for now.



    :)
     
  2. NickM

    NickM Co-founder Staff Member

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    Good Question Alan

    I usually recommend the prepayment of interest in specific situations, particularly if your income is unusually high in 1 particular year.

    Eg this may be due to a cap gain from the sale of assets.

    If you are purchasing property or shares on a regular basis then you may wish to prepay interest as an overall strategy of reducing your income.

    Another common situation may arise if you are due to have a year off work eg having children, then you may also consider prepaying interest in the year your income is higher.

    NickM
     
  3. Alan

    Alan Well-Known Member

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    Thanks Nick.

    I guess another thing to be mindful of is the ramifications if you do indeed try and repay part of the loan in the prepaid interest period.

    My latest Statement from BT carries the following small note regarding prepayments:

    Please note prepaid interest is not refundable under any circumstance even if the loan is repaid in part or full.