Interest in advance - it's that time again!

I've worked out we only need to prepay one loan this year. The cycle can be broken if you have a few loans and can wean yourself off and then save the next prepayment for when you need it.

I wonder if my bank can stuff up just ONE loan. I'll bet they can .

 

Don't confuse "interest in advance" with "fixing interest". You can do one, or do both.

The problem with fixing interest is that you are locked in for the term of the fix. If you want to sell or refinance you will be up for a break fee.

The good thing about fixing and paying in advance is bringing the interest usually paid in the following year into this financial year. That can help reduce your income if you've made a gain.

The downside is that once you do it, the following year there is no interest on that loan and you can be caught having to prepay each year or find yourself paying more tax than you need to.

If you have only one loan, and you make a gain and want to bring forward the interest deduction into the financial year that the gain is made, you have the deduction for the interest you've been paying each month and then in June you prepay the whole of the following year's interest, so you have two years' worth of interest to offset the gain.

But the next financial year, you have no interest to pay and either have to fix and prepay it again the following June, or lose out on being able to deduct interest for that particular year.

With several loans, it is easier to regulate how much you prepay and avoid prepaying in one year and then either having to continue to prepay or face a year where you have no interest deduction to offset the rental (and other) income.

 

I think I've confused things with my wording. I wont change the original post seeing it has been quoted, but when I said you can do one or the other I mean that you can fix for five years and prepay in year one, and every following year for the fix period you get to choose whether you want to prepay the next year or not.

You can fix and prepay.

You can fix and not prepay.

But be aware you may get stung with a "you've decided not to prepay" fee.

 

Fair enough. I'm with Westpac. I realise each bank will have its own rules.

I can fix and prepay, or I can fix and pay monthly. And if I fix for two years and prepay in year one, I can choose not to prepay in year two, but that entails a fee which from memory was a couple of hundred dollars.

But I guess what I'm trying to say is that you "can" break the cycle once you prepay in one financial year. But you need to be careful and know what the rules are, and where you can be tripped up.

 

Actually, this is an interesting thing, and possibly something to take into account when choosing a lender. I find many things frustrating about our lender, but this seems to be one area where they offer more flexibility than some other lenders?

 

no

ta
rolf

 

I'm waiting for another week when I'm able to fix the rate of a loan that is already fixed but about to come off.

Westpac is offering 3.88% fixed for two years P&I. This loan has been IO for over 11 years and without refinancing we cannot extend that, so we will revert to P&I and I'm just hoping 3.88% is still available in another week.