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What is an “Interest Only In Advance” Home Loan?

What is an “Interest Only In Advance” Home Loan?

An “Interest Only In Advance Home Loan” lets you pre-pay the following year’s interest.

That means you can claim it as a tax deduction for the current tax period – thereby receiving some of the interest back.

For those property investors out there who want to know more about this opportunity, we’re going to run through a few more details, including pros and cons!

Who is eligible for this home loan?

Those who:

  • Have investment loans – with loans that are tax deductible (otherwise there’s no point pre-paying the interest).
  • Are refinancing – when you refinance, your loan can be switched to a fixed rate and to interest only repayments.

You are ineligible if you:

  • Have a principal and interest or variable rate loan.

In these circumstances, the bank is unable to calculate your interest in advance.

When’s the best time to apply?

As soon as possible! The sweet spot for these mortgages is between April to June, with settlement of the loan in June. This gives borrowers the most amount of deductible interest in that financial year.

We recommend you make your application in May to avoid the EOFY rush!

What sort of discounts are available?

Actually, your total interest rate discount could be as high as 0.40%. That includes:

  • Discounts of between 0.15% to 0.20% for paying the interest in advance.
  • And an additional 0.15% to 0.20% professional package discount.

Larger discounts can be available on a variable rate portion subject to the lender’s discretion.

Benefits of an interest in advance home loan:

As we’ve said, an interest in advance home loan can help reduce the amount of tax you pay – because you receive tax benefits on your interest in the current financial year.

There are other (potential) positives to consider:

  • It’s going to relieve the pressure of regular loan repayments
  • By simplifying things, it can make it easier to budget for the next year.
  • And that fixed rate can be locked in for up to five years.

Disadvantages of an interest in advance home loan:

True, these are excellent products – however, there are some qualifications to be made:

  • They generally have fewer features and less flexibility, with restrictions on additional payments that can be made.
  • You may be subject to “break fees” if you pay the loan off early (although you may also be entitled to a refund of some of the interest that’s pre-paid).

Getting approval and settlement

Remember that to receive the tax deductions, you need to have ensured next year’s interest is pre-paid prior to June 30th. Some banks might take a while to process your loan, so it’s really advisable to get in early.  

Feel free to contact one of our experts at OzBroker if you want to discuss lenders that can approve your loan more quickly and effectively.

Applicable lenders:

You’ll find a number of major banks/lenders offering interest only loans with advance payment, including the likes of:

  • ANZ
  • Bankwest
  • Bendigo Bank
  • Commonwealth Bank
  • ING
  • NAB
  • Westpac

Feel free to contact us at OzBroker to discuss which one is the best for your needs with the most competitive interest rates!

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