Paying Interest in Advance: Is It a Smart Tax Strategy for Australian Property Investors?
When tax time rolls around, many property investors go looking for clever ways to improve their position. One option that doesn’t get talked about nearly enough is paying interest in advance. It might not sound exciting, though a few simple steps could have a big impact on your tax bill and your long-term wealth strategy.
We’re not just talking about being organised here. We’re talking about using loan repayment rules to your advantage when it comes time to complete your tax returns.
And as always, make sure you get expert advice from your accountant or tax adviser before making any tax based decisions.
What Does “Paying Interest in Advance” Actually Mean?
Paying interest in advance is where you pay a lump sum to your lender for the entire interest bill for an upcoming period of time (let’s use the example of paying the entire upcoming financial year). It is only available on fixed rate loans.
Generally speaking (and according to the ATO), interest repayments on an investment property loan are tax deductible. So if you pay interest in advance for the upcoming financial year (usually in June), in return you can claim the whole amount as a tax deduction this financial year.
It hasn’t really been something that people have talked about much in recent years and I think that’s because fixed rates have been less competitive. With fixed interest rates lowering recently and many experts tipping more to come, it’s probably time investors started looking at the strategy again.
When you can get a good tax deduction and there are good interest rate incentives, it can make a good opportunity.
Who Is This Strategy For?
This strategy might be suitable for property investors who:
- Have an interest-only investment loan
- Expect a higher income or tax bill this year compared to next year (or just have a high tax bill)
- Have access to spare cash to make the upfront payment
It’s really important to note at this stage that this strategy is NOT for everyone for a number of reasons. Once again, everyone’s financial circumstances are different, so be sure to get expert advice before making any decisions.
What are the key benefits of paying interest in advance
- A bigger tax deduction for you this financial year
- Paying interest in advance can reduce your taxable income, potentially by thousands.
- Better budgeting
- It simplifies cash flow planning. You know exactly what your interest cost is for the year.
- Sometimes cheaper rates
- Some lenders offer a small discount (e.g., 0.2%) for paying interest in advance.
Sounds great, but what’s the catch?
- Starting this cycle locks you in: Once you start paying interest in advance, stopping means you can miss a full year’s worth of deductions.
- You’ll need the cash upfront: It clearly doesn’t suit everyone without careful planning as, let’s be honest, who has a lazy cash lump sum sitting idle in June.
- Not all lenders offer it: Plus, there are only a few that have good rates to make the strategy worthwhile.
Real example: how the numbers stack up
| Loan Amount | Interest Rate | Annual Interest | Tax Deduction This Year |
|---|---|---|---|
| $500,000 | 5.69% | $28,450 | $28,450 off taxable income |
* 5.69% is an example rate currently available as at May 2025
If you’re on a 45% marginal tax rate, that’s a $12,802 saving in tax this year.
When You Should Be Getting Organised
If you’re considering paying interest in advance for the end of the financial year, don’t leave it until late June. You’ll need time to:
- Speak with your tax adviser for professional advice on the matter
- Make sure you have the spare cash
- Get approval from a lender
- Settle any refinance (if needed)
- Make the interest payment before June 30
Keep in mind it can be a lengthy and complicated process, especially if you are trying to do it yourself. Plus, we would strongly recommend against trying to do this for yourself without a professional lending adviser to walk you through the steps.
So… is it worth it?
If you’re a strategic investor with the right loan and the right income, paying interest in advance might be a smart move.
But before you do anything, I would recommend you:
- Speak with your tax adviser to confirm it fits your overall strategy
- Work with a lending adviser (like us) who knows which lenders offer competitive rates
- and can walk you through the technical steps to ensure it’s done correctly
What Do I Think About Paying Interest in Advance?
It’s not the kind of thing that gets talked about much, but honestly, it should be. For the right person, paying interest in advance can be a game-changer. It’s not just about saving tax, it’s about getting ahead.
People often don’t realise how advantageous a well-structured mortgage can be until they sit down with a lending expert who can understand how to make a finance strategy work for them. It’s something so many investors overlook because either they simply aren’t aware of the advantages for them, or they just didn’t even know it was something that they could do.
If you’ve got questions, click here to reach out and we can walk through what paying interest in advance could look like for you and your investment portfolio.
Or give us a call on 02 9194 2260. We’re happy to help.
