Whats everyones thoughts on pre paying interest on your investment property?
I was thinking of doing it but will need to borrow the money to pre pay.
What kind of loan should I look into and can I do this through my mortgage broker??
Cheers people.
How much is your interest rate that you are going to borrow the money to pre pay your interest ?
unless your interest rate was the same or lower then your current interest rate i wouldn't recommend it. Unless your pre paying interest this year to lower your taxable income (assuming negatively geared and or depriciation available). You would have to go work out if that savings is still greater then borrowing at a higher interest rate then your home loan rate.
I wouldn't bother myself unless you had an unusally high income this year. If you do it now you will have more deductions this year and little next year.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Assuming that i would take out a personal loan, then these interest rates are usually about 10-13%, which is higher than my mortgage (About 5.4%).
The reason I would pre pay is to lower my taxable income because my property is negatively geared.
Can I claim the interest and loan fees as a tax deduction?
This doesn't make sense for 2 reasons:
1. This would make your property even more negatively geared.
2. Why pay more than double the interest rate to do so?
Fees and interest could be deductible under certain conditions.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
well i dont know who to believe anymore.
negatively geared people say its a good idea, positively geared people say its a bad idea.
cs_rlewis wrote:well i dont know who to believe anymore.negatively geared people say its a good idea, positively geared people say its a bad idea.
What is a bad idea? prepaying?
I think you may not understand the concept. It has nothing to do with postive/negative gearing. All you are doing is bringing forward expenses.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
cs_rlewis wrote:Assuming that i would take out a personal loan, then these interest rates are usually about 10-13%, which is higher than my mortgage (About 5.4%).The reason I would pre pay is to lower my taxable income because my property is negatively geared.
Can I claim the interest and loan fees as a tax deduction?
Lets make put this into a example so its easy to understand. If you are earning 75k per year as your income and your have a house currently with a loan of 500k thats renting for 350 dollars per week. You would be entitled to claim the loss of the difference between your home loan repayments (ie 500k x 0.055% per year – your rent (350 x 52) and other expenses rates,insurance etc.
If your current taxable loss is say 10k per year on the property. What you are saying is that you would take a loan of $27500 dollars at (10-15% interest) to prepay your interest on your loan to get a tax deduction in this financial year (2012-2013)
Firstly your loan is going to cost your around 4k @ 15% per year in interest.
And you are only going to be able to make the claim THIS year… next year you would of already claimed in the previous year so you would have nill tax deductions besides the other expenses.
There is only one reason why you consider doing this and that is if this financial year you had a large income but you could guarantee that next financial year ie after June 31st that you are NOT going to have a larger income ie you changed jobs or went part-time, retired etc.
Here is a link from a google search on the benefits of prepaying interest:
http://www.macquarie.com.au/mgl/au/advisers/keep-up-to-date/oxygen/may-2011/interest-in-advance
Looks to me like the only real benefits in paying in advance is being able to claim this year instead of next year, as terry has mentioned above, and that you can lock in a lower interest rate for the payment.
Further it seems this is only really beneficial if you already have a lump sum of cash available for the transaction, because borrowing to do this would mean paying interest on the money you borrowed to pay your interest… and while that may be tax deductible, it seems to me like you will get nothing like the same amount back on tax as you will spend from your after tax income.
I should add… if I had a bunch of cash sitting there I wasn't using for anything else (which is unlikely), I probably could find something better to do with it than pay my interest in advance… like plonking it on the offset account to reduce the total amount of interest I would pay, and keeping it available should I need it for any opportunities that I come across.
If further tax reduction is the goal, maybe look at how you can do this with your existing property, such as through a depreciation schedule or renovation activities that also increase your property value, etc. Or if you already have maximised the return on that property, maybe look into some other investment opportunities.
cheers
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