HELP – PREPAYMENT OF INTEREST

I have just exchanged contracts on a house and would like to prepay the interest on the bank loan for the 2005/2006 financial year so that I can claim it as a tax deduction in the 2004/2005 tax year. I definitely don’t want a fixed rate loan.

Unfortunately, the bank has stated that

” you can not prepay interest on a principal and interest
loan. Principal and interest loans are designed so that the interest is
charged monthly and each month you pay the interest charges plus a little
bit extra to reduce the principal amount. You could pay a lump sum into the
loan but the system will continue to charge the interest on a monthly
basis. If you wish to pay the interest in advance, we would need to set up
a different type of loan. The only loan that offers this facility is our
Fixed Rate Interest Only Loan – Interest
in Advance. This loan can be fixed for 1 to 5 years and allows you to pay
the full years interest in advance.”

This sounds a bit bizarre – is there any reason from an accounting/tax perspective that I can’t make a conservative calculation of the interest on a principal and interest loan (or a variable interest only loan for that matter) prepay that amount and claim the tax deduction – the fact the bank then shows an interest amount each month is surely irrelevant as the payment could either be made and then redrawn or it could be a prepayment of the following years interest.

I have sought advice from our accountant but it’s close to the end of the financial year!!! Will also speak to a mortgage broker to see if it’s just a quirk of our bank. Any thoughts appreciated.

Andyman