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Taking out a home loan generally requires that you repay the principal amount along with any interest it attracts, unless your home loan allows for a period of interest-only payments. These home loans which allow interest in advance particularly appeal to investors, as they allow you to make tax deductions.
An interest in advance home loan generally is essentially an interest-only home loan with a fixed rate, which allows investors to prepay interest for the year so they can obtain tax savings and a discounted rate.
If you're looking for a home loan that allows you to repay interest in advance you might have to limit your search to investment home loans. If you have an existing variable rate home loan, you might need to look at fixed rate loans, as that's usually the type of home loan this feature is offered on.
As mentioned above, with these loans, you basically pay the interest for the following year in advance, and this can help bring down your tax liability for the given year. Some lenders also offer discounted interest rates to borrowers who pay their interest in advance as an incentive.
Prepaying interest with variable rate loans or loans that attract principal and interest repayments is normally not an option because lenders cannot calculate the interest in advance, as these rates often change over the course of a year.
George's looking for a fixed rate interest-only investment loan to buy an investment property, and he almost applied for a five year fixed rate home loan with 5.14% interest per annum. Luckily, a co-worker told him he could save some money and improve his tax if he could afford to repay the interest his loan attracted in advance.
While the lender he'd previously narrowed down upon did not offer this option, he did a little research and found one who did. Eventually, he ended up with a home loan that charged the same interest rate, but offered a 0.10% interest rate discount for all the years he chose to pay the interest in advance. Based on a loan amount of $300,000 and assuming all other factors stay constant, this is a saving or $5,267.54. Because he paid all of his interest at once, he was also able to make an immediate tax deduction.
This depends on the fixed rate period of your loan as well as how long it allows you to make interest-only repayments. You cannot make interest repayments in advance beyond both these periods.
A number of borrowers apply for these loans in between April and June, with loan settlement in June. Since they then prepay the interest in June, they can maximise benefits in the given financial year.
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