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Have you considered pre-paying your loan interest?

This strategy is in many cases best applied upon the purchase of a property prior to 30th June. So how does this strategy work? It is possible to pre-pay the interest on your investment property’s loan, allowing you to claim next year’s interest repayment against this year’s taxable income. This strategy has become increasingly popular for investors seeking to offset their tax in the current financial year.

The pre-payment period cannot exceed 12 months. Most lenders will allow you to pre-pay the interest on a loan less than 12 months, however you will need to wait until the new financial year to claim the deduction, hence many investors make the pre-payment close to June 30.

There are three key benefits to pre-paying the interest on your investment property’s loan:

  1. Interest rate: Pre-paying your interest will usually entitle you to a discounted rate on the fixed interest rate through your lender. Most lenders will discount the interest rate on the pre-payment, ranging from 0.1%-0.4%.

  2. Budgeting: You won’t need to worry about making any interest payments for 12 months. Knowing that the interest is pre-paid can provide more certainty for you as an investor when budgeting for rental property expenses.

  3. Tax planning: If you are focused on minimising tax this financial year, this strategy may assist you to create a tax saving. In most cases, the most substantial tax saving is made on the first pre-payment. If you purchase a completed property late in the financial year (now) and pre-pay the interest as close to June 30 as possible, minimum rental income has been received and you can maximise your deductions against this financial year. This will in many instances generate a higher tax deduction than would otherwise be possible.

For some, there may also be tax savings available on future pre-payments too – specifically if you have a particularly high taxable income this financial year and/or lower income the following year. This may be the case for an investor who has sold an investment property this financial year, thus incurring capital gains tax. By purchasing another investment property and pre-paying the interest, the tax rate can be reduced, generating a tax saving. Another good example would be anyone who is looking to retire or semi-retire, knowing that their income will be substantially less the following year.

This tax planning strategy may provide the opportunity to allocate the surplus elsewhere, for example, back into your principal place of residence, which will have non-deductible debt.

The best way for you to determine if this strategy is suitable for your personal circumstances is to discuss this opportunity with us. Everyone's circumstances are different, and it is best to tailor a strategy to suit your needs.

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