With the end of the financial year fast approaching now is a perfect time to review your tax and investment strategies. One strategy for property investors, which you may want to consider is prepaying the interest on your investment property loan. And with interest rates historical low rates, now could be the perfect time.
How it works
You can prepay up to 13 months of interest that would normally be incurred throughought the year as one upfront interest payment. The interest rate applied is fixed at an annual discounted rate and works best with interest only investment loans.
What are the benefits
Prepaying interest can be helpful for managing cash flow or budgeting your rental property expenses throughout the financial year. You won’t have to think about interest payments for 12 months or worry about fluctuating interest rates.
The interest is deductible in the year it is paid. This can be beneficial if you anticipate that income may be reduced in the following year. For example you may be considering maternity leave, reducing hours, or having a leave of absence from work in the following financial year.
Prepaying interest can be more efficient and saves time. You only need to claim a tax deduction for one prepaid expense, rather than keeping records of multiple expenses paid throughout the year.
In undertaking this option you can lock in a fixed annual rate and protect against possible interest rate rises over the 12 month period and enjoy a discounted fixed interest rate.
You can also harness the money that you save to service non deductable debt such as your home loan or any car repayments to accelerate these repayments and save in the long term.
For example a monthly interest saving of $200 per month on a typical home loan of $350,000 could save $90,000 in interest and reduce the loan term by 5.9 years.
We are seeing some fixed interest rates as low as 4.99% over 3 years so now could be a great time to consider re-evaluating your tax and investment strategies.
