Pre-paying tax on IO variable loan

[RedCat]

I have an IP that settles in a couple of weeks, with an IO variable loan. As I understand it, I can pre-pay the interest for 12 months and claim it in this financial year. Is that correct, and if so how does it work if the interest rate changes over the 12 month period I have pre-paid?

 

[alexlee]

Usually, at the point of prepayment the loan switches to a 12 month fixed loan. One thing to remember is that if you have an offset against this loan, the offset becomes useless in that it no longer offsets against interest.

 

[RedCat]

Oh ok perfect. I wasn't going to have an offset account on this particular loan anyway. Thanks for the info.

 

[tobe]

You cant pre-pay the interest on a variable rate loan, or you can, but you cant claim it as a deduction like you would a fixed rate.
Interest in advance fixed rate loans are a little bit cheaper than normal fixed rates, this is either a happy coincidence, or because if it were the same interest rate, the ATO would argue the only reason you were pre-paying was to lessen your tax, which your not supposed to do.
Just dumping a years interest in a variable rate loan is not pre-paying interest, and is only tax deductable for the year it occurred (not for the following tax year or part thereof).

 

[alexlee]

You cant pre-pay the interest on a variable rate loan, or you can, but you cant claim it as a deduction like you would a fixed rate.
Interest in advance fixed rate loans are a little bit cheaper than normal fixed rates, this is either a happy coincidence, or because if it were the same interest rate, the ATO would argue the only reason you were pre-paying was to lessen your tax, which your not supposed to do.

When I called Westpac they said that basically the loan converts into a 12 month fixed loan, and I'm prepaying the interest on that. In that case, I can claim it as a deduction.

Just dumping a years interest in a variable rate loan is not pre-paying interest, and is only tax deductable for the year it occurred (not for the following tax year or part thereof).

Correct, because in that case it would just be paying off part of the principle, not paying interest.

 

[wylie]

We prepay interest and you need to get the ball rolling early because it entails new documentation to be signed and arrangements made to draw the interest from a particular account on a particular day.

We fix for one, two or more years and the loan is fixed for that period. If we don't fix and prepay at the end of that fixed and prepaid period, then it reverts back to an IO variable loan.

 

[tobe]

Depending on the lender it can revert back to I/O variable, P&I variable, or in at least one lenders case a new application and loan is required, as they write the fixed loan as the term of the loan.
Its important to find out what happens at the end of the fixed term, as it can have an effect on future borrowing capacities/cashflow etc.

 

[RedCat]

Thanks for all the tips and advice guys. Loan is with the NAB. I haven't yet spoken to them about it but will update this forum when I have

 

[Rolf Latham]

beware that woth some lenders its a "credit critical" process and requires a new loan app to boot

ta

rolf

 

[RedCat]

I spoke to NAB yesterday and was told it was too late to change it from variable right now, but when I go in to sign the papers late this week, they'll set it up to switch to a fixed loan for 12 months so I can pre-pay before the end of June. All good. Thanks for the advice everyone.

 

[JoshyBoi]

I spoke to NAB yesterday and was told it was too late to change it from variable right now, but when I go in to sign the papers late this week, they'll set it up to switch to a fixed loan for 12 months so I can pre-pay before the end of June. All good. Thanks for the advice everyone.

I bet ya this is so they can factor in yesterday's rate rise first

 

[tobe]

Be sure to ask them if or what it rolls to after the fixed term expires. In the past NAB was one of the lenders who didnt automatically roll their interest in advance loans, it involved a whole new application/loan.
This can be problematic if your details change in the interim.