Interest in advance on IP from extra money on PPOR

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Ez
Member
@ez
Join Date: 2010
Post Count: 26
June 2, 2011 - 8:22 am
HI,
Just wnating to get some opinions (prior to seeing accountant) on whether I should pre-pay interst on an IP from the extra payments made on a PPOR. Note sure if there is a tool out there that calculates the sums, but we are both 50% owners on IP, and both in high income brackets with no a great deal of deductions this financial year. Any advsie or questions to ask accountant would be greatly apprecaited.
Richard Taylor
Participant
@qlds007
Join Date: 2003
Post Count: 12,024
June 2, 2011 - 10:27 am
Hi Ez
Hate to say it is not a matter of merely making advance repayments on your IP as the loan itself needs to be restructured to allow payments in advance.
With tomorrow being the 3rd June you would pretty lucky to have any lender approve and have documents out ready to settle this side of the financial year end.
Calculation is fairly simple and will depend on your current and future marginal taxable income and circumstances.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Ez
Member
@ez
Join Date: 2010
Post Count: 26
June 2, 2011 - 11:47 am
Thanks for your feeback QLds007. I do have the documents in prepertaion for advance payments and have about 10 days in which to get it back to the bank. You mentioned a simple calculion….any chance you have time to ellaborate? Note, I expect to remain on high income for a while yet.
Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213
June 3, 2011 - 12:19 am
You could do that but it would be messy (tax) unless you had a separate loan account split up.
This is because you will be borrowing for investment purposes and mixing this with you non deductible loan. Only part of the interest would be deductible. This is ok and can be worked out, but every subsequent repayment to your home loan will come off the investment portion as well and this is in the same percentage as the loan portions.
eg. You have $80,000 loan and borrow $20,000 to prepay investment expenses, The interest on $20,000 is deductible.
If it is one big loan then 80% is private and 20% investment.
So every repayment you make to this loan must come off the principle of the investment part at 20% and the personal part at 80%.
This is less than ideal as you want to pay off all your personal non-deductible loan first to maximise your tax savings. It is also difficult to work out interest portions after a while.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
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Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au