It is the end of financial year next month and investors can consider using an investment and taxation strategy known as ‘interest in advance’ in which they pay the next year’s interest on their investment loans in advance. Only those with fixed rate investment loans have the option to pay interest in advance and conditions vary between lenders.
There are several reasons why paying interest in advance can be advantageous for investors. The primary reason is usually to gain tax benefits, e.g. paying the interest that will be accrued in FY2014/2015 in FY2013/2014 and offsetting it against income earned in FY2013/2014, particularly if an investor’s income was unusually high during the financial year or if a lower income is expected in the next financial year. Lenders will often incentivise clients to pay interest in advance by offering them a discount which results in less interest being paid overall. For investors looking to simplify their finances, by paying interest in advance, especially on an interest only loan, they can eliminate the need for periodic payments throughout the year. In terms of budgeting, paying interest in advance means that investors can enjoy a discounted fixed rate for the whole year, regardless of rises or falls in interest rates.
The interest in advance option is available to both new and existing investment loan clients. If you are considering this option it is worthwhile consulting your financial adviser to make sure that it suits your requirements.
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