SAIM10090 | Relief for interest paid: reasonable commercial rate

Reasonable commercial rate

When assessing whether the interest paid to date is in excess of a reasonable commercial rate the judgement should be made on the basis that this would be the expected rate on a loan on the same terms as the taxpayer’s loan taken out at the same time.

For example, if the taxpayer took out a loan for 5 years at a fixed rate of 7% (a reasonable commercial rate at that time) but by the end of year 5 the lender’s standard variable mortgage rate was only 4% you should not argue that the 7% paid in year 5 was in excess of a reasonable commercial amount. This is because the rate was a reasonable commercial rate for a 5-year fixed-rate deal taken out 5 years previously.

Whether interest is paid at a ‘reasonable commercial rate’ will depend on the perceived risk to the lender. A borrower with a poor credit history, or someone taking out an unsecured personal loan, is likely to have to pay a higher rate of interest than the standard variable mortgage rate.