Articles

Let’s talk about a strategy that not too many have heard about. Interest Only in Advance (IOIA). It’s one of those “best-kept secrets” that experienced property investors use to level up their portfolio.

If you’re approaching retirement or planning a career break (think, mat leave), this is for you. Most people have never heard of it.

What is Interest Only in Advance?

In plain English, IOIA is when you pay a full year of interest on your investment loan upfront in one lump sum.

Usually, when you have an investment property, you pay interest every month. But with this strategy, you pay your interest every month as per normal, then in June, you pay for the next 12 months all at once, meaning you’ll have two years of interest deductions to claim in a single year.

By doing this, you satisfy the 12 month rule under the tax laws (specifically s 82KZM of the ITAA 1936, if you want to sound fancy at your next BBQ).

Who is this strategy suited for

This isn’t a “one size fits all” move. It’s highly strategic. Our brokers, Tristina Haines and Simone Winefield, often see this work best for people in two specific life stages.

The retiring investor

If you’re in the final few years of your career, you’re likely on the highest tax bracket you’ve ever been on. You’re earning the big bucks, but you know that in a year or two, your income will drop significantly when you retire.

By prepaying interest now, you’re claiming a massive deduction against your high income (saving you 47 cents on the dollar [July 2026]). Next year, when you have no interest to deduct, your rental income will be taxed at a much lower rate because your overall income has dropped. It’s a brilliant way to shift your tax burden.

The career break champion

Maybe you aren’t retiring. Maybe you’re just taking a year off to travel, heading on a sabbatical, or taking maternity or paternity leave. If your income is going to be significantly lower next year, prepaying your interest while you’re still working and earning high income is a savvy move.

Let’s look at the numbers

Finance is better with examples. Let’s look at how this would actually play out in the real world for an investor with a $1.5M loan.

The Setup

• Loan amount: $1,500,000 (investment lending)
• Interest rate: 6.5%
• Annual interest: $97,500
• Current tax bracket: 47% (including Medicare levy)
• Future tax bracket (Retirement): 30%

To fund the prepayment, you decide to release equity from your home by setting up a new loan split of $97,500. Just a heads up, the interest on this specific split may not be deductible (check with your accountant) because the funds are being used to pay interest, not to buy an income-producing asset. I have factored that in.

The mechanics of prepaying interest

There are a few things you need to know before going with an IOIA loan.

• Fixed rates only: Lenders will only let you do this if you lock in a fixed rate for that 12-month period. Makes sense – you’re paying it all on the same day.
• Discounted rates: Usually, lenders offer a slightly lower rate for prepaying in advance compared to their standard fixed rates. Winning!
• No offset accounts: Because the interest is already paid, you can’t use an offset account on these specific loan splits.
• Limited lenders: Not every bank offers this. In fact, many of the big ones have very specific products for it. This is where having a broker like Simone or Tristina helps, we know exactly which lenders play ball.

Things to consider and risks

This is an expert strategy, which means it requires expert planning.

Lump sum cash needed

Not everyone has a lazy $100k laying around to throw at an interest prepayment. Whether the money is sitting in your bank account or you’re releasing equity through a loan split, you have to pay the whole year upfront. If you don’t have the equity or the cash, this strategy won’t work for you.

Selling mid period

If you decide to sell your property halfway through the year you’ve prepaid, things can get messy. You’ve already paid the interest to the bank. Lenders likely wont refund the unused portion, and the tax deduction you already claimed might need to be adjusted. This strategy may not be right for you if you’re selling.

End of the period

When the 12 months are up, your loan will usually roll back to a standard variable rate or you’ll need to re-fix it, or you can choose to go IOIA again.

If you do nothing, it will automatically switch to a standard variable rates with normal repayments, so you’ll need to be ready for your monthly repayments to start up again.

Questions to ask your accountant

Because this strategy is so heavily tied to your tax, we always recommend chatting with your tax guy (or gal) first. If you’re not sure what to ask, here are a few prompts to get the ball rolling:

• Does the “12-month rule” apply to my specific financial situation?
• Based on my projected income for next year, what is the actual dollar benefit of prepaying interest this year?
• Are there any “anti-avoidance” rules I should be aware of for my portfolio?
• How should we document the equity release split to ensure we keep the records clean?
• Can I claim the interest on the equity release split?

Time to lock it down

Timing is everything with Interest Only in Advance. This isn’t something you can decide to do on June 1st and expect it to be ready by June 30th. Banks need time to process the applications and set up the new loan structures.

We recommend starting the conversation at least 3 to 6 months before the end of the financial year. If you’re looking at next year’s tax return and thinking, “I need to do something about this,” now is the time to chat.