Interest Only in Advance (IOA)

Many lenders now offer an "interest only in advance" option with some of their fixed rate loans. A fixed rate loan allows you to lock in an interest rate for periods of up to 10 years with some lenders. Fixed rate loans with an interest in advance option allow you to pay the interest component of your loan for a year in advance.

Usually there is a discount of between 0.1% and 0.2% on the rate to reflect the fact that the lender has your money earlier - and so pays less interest itself. But why would anyone want to make interest payments to the bank before they fall due?

A borrower with spare cash available may simply want to pay interest in advance so that they don't have to worry about making payments for another year. Or they may want to lock the rate in for a short period.

But tax considerations are the main ones driving interest in advance lending. An investor who pays the interest on their loan in advance before the close of the financial year can generally use any allowable interest deduction to reduce their taxable income in that financial year without having to wait until the end of the following financial year.

Remember that most of your savings from IOA are from the pull forward of refunds - the total amount of refunds will generally stay the same but you'll get them sooner, so you'll get a free loan from the Government. Against this you pay interest earlier so you'll incur your expenses sooner as well. So you need to balance the benefits against the costs.

But if you expect to go into a lower tax bracket in future years then IOA will generate genuine tax reductions, as your expenses are weighted towards the year in which tax is highest and so refunds will be greatest. (Remember these are general comments and we are not tax advisors. You should get a tax professional to check any plans you have against your specific circumstances).