Westpac P and I to interest in advance

[coola71]

Hi

I have a question.

Current situation is as follows:

- I have two Westpac Fixed Investment Property Loans
- Each Loan is $350K
- One of the loans is fixed for 2 years (1 year left) at 4.99% and the other is fixed for 5 years (4 years left) at 5.69%
- One of the loans I have $30000 in redraw and the other I have $10000 (Westpac only allows max of $30k over fixed period for each loan)
- Both loans are currently Principal and Interest.

I want to change both of these loans from Principal and Interest to interest only in advance so I can then prepay interest in advance. As I estimate that my interest is about $35000, I am hoping to get a tax gain of roughly $12000 by prepaying interest for the next financial year in this year.

Can I make this change on the Westpac from P and I fixed to Interest only in advance fixed when both loans are currently fixed?

Westpac website seems to suggest I can.

https://www.westpac.com.au/personal-banking/home-loans/fixed/interest-only-advance/

 

[r3ckless]

Without looking at your link. I believe you cannot. If you are commited to a fixed rate already.. you will have to break out of your current fixed rate and switch it to the current one year fixed rare interest in adcance rare...

 

[tobe]

put another way, yes you can, but it will cost you. these break costs may be tax deductable though....

 

[HotRod]

Must be that time of year again.

 

[D.T.]

Interest in Advance isnt a payment option, its a different product. You'd have to break your fixed rate period to change products, I assume.

 

[MatC]

Having worked for Westpac for 12 years. you can't even change from PIF to IO on a fixed loan with out it being classified a break to the contract so defiantly no to this. You also need to be careful that the loan was originally investment as a home loan that was switched to investment can not be changed to Interest in advance needs to be re written, had a few last minute panics with that one!

 

[coola71]

Yep

Rang Westpac and confirmed as such above.

To break the 2 year fixed it is $1409 (with 1 year left on the loan). To break the 5 year fixed it is $7000 (with 4 years left).

Looking to break both, then fix 80% of the loan interest only in advance at 4.79% for 3 year fixed (let me know if anyone knows any good 3 year interest in advance) and then have the remaining 20% with an offset.

Break costs are paid for by (i) as a tax deduction (ii) lower interest of 4.79% for 3 year loan compared to the 5 year rate I had of 5.69%.(iii) tax deduction through interest in advance which I estimate gives me a $10000 windfall from the tax man.

 

[Aaron_C]

That's a massive break fee just to get some pre-June 30 tax deductions.....come on...think about other things apart from tax deductions.

 

[alexlee]

(iii) tax deduction through interest in advance which I estimate gives me a $10000 windfall from the tax man.

Where is the interest in advance money coming from? Whats the cost of using it now instead of leaving it in a high interest account?

 

[coola71]

But Aaron, if I dont break this year, then I wont be able to claim for the next 4 years.

Also the cost of the break fee is offset well and truly by (i) tax deduction of the break fee (ii) the new 4.79% compared to the current 5.69%.

On a 500k loan, I think it averages out better. By being able to pay interest in advance, it means I get back about 8 to 9K each year as a tax deduction by going interest only in advance.

 

[coola71]

Where is the interest in advance money coming from? Whats the cost of using it now instead of leaving it in a high interest account?

I have about 30k in one of the fixed mortgages and another 20k in another.


Getting interest on say 30k at 5% is only $1500 a year or so. But paying that 30K in interest gives me at least $10k from the tax man

 

[alexlee]

Interest in advance only moves next year's deductions into the current year. If your other income is relatively stable year on year, there's not much advantage, especially as you have to fund the amount in the first place.

I don't understand what you mean by you won't be able to claim for the next 4 years. The interest paid on the fixed rate loan is also deductible, assuming the money was used for investment. You just can't do interest prepayment.

 

[D.T.]

Its not worth it mate

 

[alexlee]

I have about 30k in one of the fixed mortgages and another 20k in another.

Getting interest on say 30k at 5% is only $1500 a year or so. But paying that 30K in interest gives me at least $10k from the tax man

The point being that you get 10k back on tax, but lose out on 1.5k. What happens next year? That interest would have been deductible next year. If you don't repeat the interest prepayment, you have no interest to deduct. What you've basically done is brought the 10k tax benefit into this year, fine, but at a cost of 1.5k. Add the 8k break fee, and you're barely breaking even by doing this.

Generally, prepayment of interest works best when done in a year when your marginal tax rate is higher than in future years. e.g. if you have lots of investment gains, etc pushing you into the next tax bracket.

 

[coola71]

Interest in advance only moves next year's deductions into the current year. If your other income is relatively stable year on year, there's not much advantage, especially as you have to fund the amount in the first place.

I don't understand what you mean by you won't be able to claim for the next 4 years. The interest paid on the fixed rate loan is also deductible, assuming the money was used for investment. You just can't do interest prepayment.

I understand, all I meant was that I wont be able to prepay the interest and get that back each year.

What I understand is that by going interest in advance is that I lose my last year of interest claiming on the loan (because it has been prepaid)

 

[coola71]

The point being that you get 10k back on tax, but lose out on 1.5k. What happens next year? That interest would have been deductible next year. If you don't repeat the interest prepayment, you have no interest to deduct. What you've basically done is brought the 10k tax benefit into this year, fine, but at a cost of 1.5k. Add the 8k break fee, and you're barely breaking even by doing this.

Generally, prepayment of interest works best when done in a year when your marginal tax rate is higher than in future years. e.g. if you have lots of investment gains, etc pushing you into the next tax bracket.

I am going to prepay the interest each year from now on because my income will allow me to. My point being is that I am going to prepay interest on the rest of the future years so I only lose out on the last year which will be in say about 10 years time

 

[alexlee]

I am going to prepay the interest each year from now on because my income will allow me to

If your income is relatively stable (i.e. you're on about the same marginal rate every year), there is not much advantage of doing this, especially with the break fee. Prepaying interest increases your deductions for the first year only, but you have to fund that up front.

If you expect your income to increase especially to the point where you hit the next tax bracket, prepaying hurts you.

Are you saying that in the future your income will not allow you to prepay interest? What does that mean?

 

[coola71]

If your income is relatively stable (i.e. you're on about the same marginal rate every year), there is not much advantage of doing this, especially with the break fee.

If you expect your income to increase especially to the point where you hit the next tax bracket, prepaying hurts you.

Are you saying that in the future your income will not allow you to prepay interest? What does that mean?

Sorry I meant that in the future my income will allow me to prepay interest as I am making over and above the required repayments.

All I thought that interest in advance would be doing is moving the interest payable next year into this financial year and then being able to claim. So really, in my last year, I then wont be able to claim that interest, as it has been claimed in the previous financial year already.

 

[alexlee]

All I thought that interest in advance would be doing is moving the interest payable next year into this financial year and then being able to claim. So really, in my last year, I then wont be able to claim that interest, as it has been claimed in the previous financial year already.

All correct, though the advantage isn't as much as you think, especially with that break fee.

 

[coola71]

But on 500K, the difference between 5.69% and 4.99% for 3 years equates to about $7200, the cost of the break fee.