paying years interest up front

[clifmand]

Hi all, new to this investment lark.
Other half and I have purchased block of land to build 1st IP, block purchased in December build to start soon but probably not ready for rent before tax year ends.
Question. Is it worth us paying next years interest up front in this financial year?
Pay based on last year’s taxable income is
She $68540.0 me $59046.0 this year will be slightly higher.
Block of land cost $231,000. Interest being paid from LOC at approx $1285 pm.
We have been toying with the idea of paying the interest up front will we gain any benefits, the payment would be made from LOC so understand that we would then be paying interest on this.

Any advice or ideas would be gratefully appreciated.

 

[clifmand]

Any suggestions or advice out there please.

 

[yo yo ma]

I thought about this with my first property but decided against it. This was because each June you would have to prepay again or the benefit is effectively lost... this may get more difficult if something unforeseen comes up or as you build up more properties.

The only way I can see a benefit is if you have a significantly higher income this year, rather than next... For example, you are about to have a baby and your income will reduce next year.

 

[wylie]

I didn't reply to this when I first read it because I am not a whiz with maths and don't know about your particular situation.

However, we have been prepaying our interest for several years. (I think from memory we first did it to increase our outgoings in a year we had sold an IP and had a big capital gain.) It is worth it to us because we get the tax back and it sits in our housing offset account and we then add to it so we have it ready for the next year.

Last year we had to borrow to prepay the interest on two loans totalling just under $1M. This year we will borrow again. I would not suggest this is the ideal thing to do, but it has enabled us to hold more property through the recent Brisbane market increases.

If the market tanks or stagnates, we will look at our total situation, and change tack if we need to. But for the past couple of years, the value of our IPs has risen by considerably more than the interest, so for now, we are comfortable with it.

Next year we will review again, but because there are two loans, we will possibly only prepay one of the loans.

Plenty of people do it differently, and do a tax variation, but I like having no monthly payments for the year and having the tax refund sitting in an offset account.

 

[Aaron Sice]

if you run an LOE against the property, i have heard of people using this to pay the interest up front. however, it really only works in a cashflow +ve situation and the rent can accumulate faster than the mortgage can be paid otherwise you're just paying debt with debt and that sh1t doesn't work for too long.

 

[wylie]

It is working for us and we are not in a cashflow positive situation.

BUT... we are very aware that it only works right now because our asset value is rising considerably faster than our loan is growing. That WILL change and we will change course when we need to.

 

[Kenster]

Clifmand,

You can claim the interest cost only when the said property produces income.

If the property is unavailable for rent (ie. being built) in the year then prepaying interest has no effect on that year tax return. You would lose its tax deductibility in the next year (when the rental income coming in).

Check with an accountant for your specific circumstance.

 

[clifmand]

Thanks for your replies, I did not realise that we would not be able to claim the interest whilst the home is not built, I thought if the intention of buying the land and building is for an investment property you were able to claim the interest paid even on just the land.