~ Newsletters

It's still a few
months till the end of the financial year, but now is the time to start thinking about
it. Each year there's a big rush of
applications and lenders often close their books a few weeks before the end of
June to get all the work done.

You should consider the interest in advance option each year, for its
unique tax advantages. By paying next year's interest early you can claim the
deductions one year early too.

This year interest in advance (IOA) offers unusual value for two special reasons.

1. Taxes are falling in July this year. So by paying in advance, you maximise your
interest deductions against higher tax rates and minimise it when tax is
lower. Many of those earning over
$63,000 per year are likely to gain additional benefits by maximising this
year's tax deductions, though individual circumstances will differ.

2. IOA loans are on a fixed rate. And as previously discussed, fixed rates are
unusually low given that the Reserve Bank's bias remains to raise rates. And as an economic consultant I receive lots
of e-mails each week outlining various economy watchers' views on rates. I attach an email I received from Rory
Robertson, Macquarie Bank's Interest rate strategist, where he outlines his
reasons for changing his mind on rates (arguing now that they're headed up). And
this was before very strong employment news came in, which would have
strengthened his arguments for a rate rise.

So paying interest in advance before June 30 this year is effectively
killing two birds with one stone. As
usual we've built a special calculator
to cut through the complexities and given you an indicative snapshot of what
it's worth to you.

Give us a ring
and we'll send you a full no-obligation report
outlining the indicative savings you can expect (if any) with
IOA.

How it works:

If you've paid interest monthly in arrears this year and now pay all
of next year's interest in advance before June 30, 2006, then you will in most
normal circumstances effectively claim two years' deductions in one
year.*

You can keep doing this in future years - instead of claiming two
years' interest this year and no interest next year, you can pull forward
interest payments again next year and each year after that. The total amount of
tax refunds will generally stay the same but you'll get them sooner. In effect,
it's a free loan from the government. And the "loan" from the government can
stretch out a long time.

Paying interest in advance can be particularly advantageous if the
tax rate you'll pay next year is lower than your rate now. As explained, tax cuts are likely to make
this the case if you earn over $63,000, but it may also be the case if you think
you're taxable income will fall next year - if you're going on a break, going
part time, having a child or whatever.

You might also be able to use the year your interest payments are
minimised for an "interest pause" in case you need some breathing space in the
event of an unexpected drop in income or change of personal
circumstances.

So, paying interest in advance could effectively save you thousands.

Downsides

Before we look at some examples, there are downsides that should be
considered.

You'll pay your interest earlier, so you incur your expenses as well
as get the benefits of tax deductions sooner, although generally your free kick
from the tax office can be organised fairly quickly after the financial year,
with your refund put into your mortgage.

Also fixing lowers risk, but risk isn't all bad. There's upside risk
and downside risk. It's possible you'll fix for the next year only to find rates
actually fall.

I think that a drop in rates is somewhere between unlikely and very
unlikely in the next financial year, and most economists think that any move in
rates will again be up rather than down, but none of us have crystal balls.

How to Proceed

Contact us right away, so that we can provide you with some
calculations and some ideas. We've been scanning the market for the most
competitive interest in advance loans, so you can pick our brains. And if you
refinance your loan through Peach, you can pick our pockets too.

Our normal rebates still apply. That's $1,000 or more back to you for
most many loans over $300,000 and generous rebates for loans from $150,000 -
unless you got a loan from us in the last three years in which case reduced or
zero rebates may apply.

Example: Susan

Here's an example of a hypothetical property investor, Susan, who is
thinking about paying interest in advance. She currently has a loan with a balance of about $350,000 and variable
interest rate of 6.60%. Susan is
considering switching to a 3 year fixed rate IOA loan with a rate of 6.45%.

If Susan chooses the interest in advance (IOA) option and claims the
interest this financial year then her marginal tax rate for the year will fall
from 42% to 30%. (ignoring the Medicare levy of 1.5%) Also, as the IOA interest
rate is slightly lower than the variable rate, if she chooses the IOA option she
will be required to pay less interest than if she pays next financial year. Choosing the interest in advance (IOA) option
has two additional effects which work against each other to roughly even each
other out.

Money has a time value - a dollar today is worth more than a dollar in one year's time
(because it earns interest). Hence a tax
deduction this year is worth more to Susan than a tax deduction next year, as
any refund could be reinvested now. Likewise if Susan pays next year's interest now it will cost her more
than the same interest payment in one year's time, as she could have used the
cash put towards the interest to invest in some other income producing
investment. In this example the net
effect leaves Susan with over $1,000 more in her pocket than if she chooses to
remain on her current variable rate
loan.

If Susan is contemplating taking some time off from work
next year the effect would be amplified. Let's say she expects her income to drop around 20% next year to about
$68,000. If she chooses the IOA option
this year her marginal tax rate will still drop from 42% to 30%. Due to next year's reduction in tax rates, in
2006-07 her marginal tax rate will fall to 30% regardless of whether or not she
pays interest during the year. In these
circumstances, choosing an IOA
option will leave Susan with nearly $3,000 extra in her pocket.