Pre-paying Interest

I tried searching but found bits and pieces related to this topic.

Just wandering if the experts here could put a few bullet points together and create a 'Pre-paying Interest' for dummies post or if anyone would share their experience in this area.

While I understand in theory the concept of creating a tax deduction I still don't understand how it's arranged with a bank or timing in a financial year.

Lenders sometimes allow a person to pay up to 13 months interest in advance. This means prepaying interest in Jun for the whole next financial year.

Can be useful if you need deductions this year.

I think there were some ATO changes in the last few years in regard to this. Anyone?

Hi,

I've not heard of any ATO changes and know of people who still do this.

You basically need to work out your tax position early, and figure out which loan(s) you need to pay advanced interest on in order to get that tax position close to zero. Arrange it the start of June and they should have it sorted in time.

For the ATO to allow it to be duductable, there needs to be some commercial reasoning behind it. In this case, perhaps a slight interest rate discount might be in order

Cheers

this strategy works particularly well if you have an unusually high income in one year. ie a Capital gain

This should be planned no later than March / April and you generally have to lock your loan into a fixed interest rate for 1 year

Cheers
nickm

And of course you arent doing it to gain a tax advantage.

You are doing it to get the .1 to .2 % discount you can get for pre payment.

"Commercial" reasons are always good

ta

rolf

Get your applications in early, don't leave it to June. I have had some lenders fix with a simple fax request, and another made me do an entire new application, valuation, credit check, the lot. Took over 4 months.

I think LE do it around May or June with a simple form to complete. I remember one year faxing a handwritten letter to them mid June from an internet cafe in the Golden Triangle on a trek stop!

Cheers,