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Fixed rate interest in advance home loans
Pay the interest on your home loan in advance and look forward to the possibility of tax savings.
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.
How does a fixed rate interest in advance home loan work?
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 investment loan savings
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.
How to compare fixed rate interest in advance home loans
- Interest rate. One of the first aspects to compare with these homes loans is the interest rate they offer, and even with fixed rate home loans interest rates can vary noticeably from one offering to the next. When wanting to pay interest in advance, look for loans that offer interest rate discounts to borrowers who do this. Keep in mind that the advertised rate will not take into account the fees the home loan will charge, so add this to your comparison.
- Fixed rate period. The fixed rate period a home loan attracts usually varies in between one and five years, although home loans can have terms as long as 10 and even 15 years. At the end of this period, the loan starts attracting a standard variable rate unless you choose another fixed period. The period you can make interest-only repayments can also vary from one loan to the next. Both these factors would affect your ability to make advance interest repayments down the line.
- Features. Don't expect too many features from such a loan, primarily because fixed rate loans tend to come with minimal features. For example, it's hard to find a fixed rate loan that allows extra repayments without charging a penalty, and not many fixed rate loans come with linked offset accounts. Still it's a good idea to try to find features which will make your life easier, such as a loan which offers a relationship manager or 24/7 access.
- Repayment flexibility. When you pay the interest your home loan attracts in advance, you have little in terms of repayment flexibility, because you make a lump sums payment on your interest.
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Pros and cons of a fixed rate interest in advance home loan
Pros
- Save on interest. If you get a home loan that allows you to make interest repayments in advance, you can usually look forward to a discounted interest rate, and this enables you to save how much you pay in the form of interest.
- Make lump sum payments. Because these loans are generally interest-only home loans, you don't have to worry about making weekly, fortnightly, or monthly repayments. You simply make one payment to pay your interest costs of for the year.
- Decide if you wish to continue. When the first year comes to a close, you get to choose if you want to continue with the same for the next year, and you get to do this until the fixed rate period or interest-only period comes to a close as well.
Cons
- Not many features. Most loans that give you the ability to make advance repayments of interest fall short on offering other features. As a result, if you're looking for such a loan, but want a range of features as well, you might find it very hard to find a suitable alternative.
Things to consider about fixed rate interest in advance home loans
- Hidden fees and charges. Make sure you find out about all associated fees and charges at the onset, because you can avoid certain fees like loan application fees, loan settlement fees, and first-valuation fees.
- Refinancing without calculating. If you want to refinance to a different home loan to use this facility, make sure you take into account all the costs associated with making the switch.
Frequently asked questions about fixed rate interest in advance home loans
For how long can I keep making interest repayments in advance?
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.
Is there a good time to apply for this type of loan?
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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