Ahead Of Schedule

Sydney Morning Herald

Wednesday June 28, 2000

VITA PALESTRANT

If you are thinking of making a pre-payment of a year's interest on your negatively geared investment property or shares, make sure this strategy also gives you access to lower

interest rates.

While paying interest in advance offers tax and cash-flow benefits, there is another less obvious advantage: it should enable you to access lower interest rates.

By paying the interest ahead of schedule, instead of month by month, you are giving the lender an unexpected bonus. Some financial institutions recognise this by lowering rates. Westpac, for example, shaves 0.15 per cent off its one-year fixed investment-property loan if you pay 12 months in advance (the rate falls from 7.49 per cent to 7.34 per cent).

In the case of margin loans, the saving is bigger. If you pay monthly in arrears the rate is 9.05 per cent; pay in advance and the rate drops to 8.65 per cent.

Andrew Willink, managing director at the interest-rate research company Cannex, says not all investors are aware of the difference and the potential savings they can make. "You are giving the lender more money than you should. It's money [people] can invest and use to their advantage. Therefore, the rate should be adjusted accordingly,"

he says.

"Borrowers need to check with their institution beforehand whether they will get the benefit of a lower rate if they pay in advance," he advises.

8.5%

AUSTRALIAN SHARES

All ords accumulation index

23.45%

OVERSEAS SHARES

MSCI World Price Index in A$

5.57%

FIXED INTEREST

UBS Warburg Composite All Maturities

Index

7.52%

PROPERTY

ASX

Property Trust

accumualtion index

Source: MERCER FINANCIAL PLANNING, ALL FIGURES SHOW RETURNS FOR THE YEAR TO 23/6/00.

© 2000 Sydney Morning Herald

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