If you own or are looking to purchase an investment property, pre-paying your interest can be a great way to save money at tax time. You’ve probably heard this tip before, but do you know how it works and why it’s so beneficial? Let’s look at the ins and outs of pre-paying your interest on investment properties.
How Pre-Paying Interest Works
When you make a mortgage payment, it is typically split up between principal and interest. The interest portion of your payment goes to the lender for providing funds that allowed you to purchase the property. However, with pre-paying your interest, you are paying off the interest upfront which may allow you to claim it as a tax deduction and reduce your taxable income. While this may seem like a small difference at first, over time these savings can really add up.
Benefits of Pre-Paying Interest
Pre-paying your interest can have several financial benefits for investors who own rental properties. For one thing, when you pay less in terms of interest payments each month on your mortgage loan, the income from tenant rent payments is more likely to exceed expenses. This increases cash flow which can help offset any dips or fluctuations in rental income down the line. This benefit can be seen in a multitude of ways, whether it’s paying off a loan earlier, a discounted rate on fixed interest rates or to create a tax saving.
How much can you Pre-Pay?
Although lenders will typically permit you to prepay interest on a loan that has not exceeded 12 months, the tax deduction cannot be claimed until the beginning of a new financial year. Therefore, many investors choose to make their pre-payment just before June 30 to take advantage of this benefit sooner. Tax savings may also be available on future pre-payments, particularly if you have a high taxable income this financial year and a lower income the following year.
Remember everyone’s goals and circumstances are different. Pre-paying your mortgage interest can be a smart strategy for boosting cash flow and saving money over time on investment properties—especially rental properties—but it’s not suitable for everyone’s situation so do some research before making any decisions. When done correctly, pre-paying your mortgage interest can lead to big long term savings while also providing immediate benefits such as increased cash flow and potentially greater tax deductions down the road.
Property owners and investors should consider speaking with their financial advisor about whether pre-payment might be right for them based on their unique circumstances.
Disclaimer:
Terms are subject to approved persons only. This information is true and correct as of 14/03/2023. All of the content above is general in nature and may not suit your personal needs, situation objective & goals.
