Interest only loans
Interest only loans are suited to the investor, or in some cases the family pledge borrower, and allow the investor to preserve the debt on a property. They can be combined with an offset account in most cases, unless fixed or basic, which can help as a management tool for investment properties.
For the live in investor or owner occupier, interest only loans can be a means of preserving the debt against the current property, which may become a rental property, whilst a deposit is saved in offset for the next property. This way they get all the benefits of having paid down the loan, whilst maintaining a healthy loan balance that could become tax deductible down the track.
Interest only in advance
Interest only in advance loans are for the more sophisticated investor in most cases, as investors or business owners may look to these types of loans for immediate tax relief if purchases are made late in the financial year. The interest rate is fixed, normally at a discounted rate to standard fixed rates. When the loan settles, the entire year’s interest is paid into the loan.
A working example would be if $400,000 is borrowed 3 years interest only in advance (IOIA) at 4%. At the settlement date $16,000 would be due, then due again 12 and 24 months from settlement. If an investor purchases and settles on the above property prior to June 30, they will be able to write off the year’s interest in that financial year with next to no rent offset, then use the rent to stockpile for the next year’s payment. Even purchasing another rental the following year could keep moving the tax write off forward.