Refinancing an SMSF home loan

Can you refinance an SMSF home loan?

"There are only a few lenders that would consider SMSF lending which is usually outside your mainstream lenders like the major banks," says Mortgage Expert Nick Chong. These loans are complex in nature, "held under a bare trust (custodian trust) via a Limited Recourse Borrowing Arrangement (LRBA), which makes refinancing more paperwork-heavy."

Chong says it can be difficult to refinance an SMSF loan because "SMSF lenders apply tighter loan-to-value ratios (max 70–80%) and liquidity tests — you usually need 10 – 20% of the fund's assets in cash after refinance or purchase (depending on the lender)."

The benefits of refinancing

The main benefit of refinancing an SMSF home loan is the same as refinancing any other home loan - getting a more affordable deal. If your loan has a high interest rate attached and there are other similar loans available on the market offering lower rates, you could save thousands over the life of the loan by switching. Alternatively, you could switch to a loan that offers different and more flexible features.

How to refinance an SMSF home loan

SMSF loans work differently to most home loans. When applying for a new one, you will need to review all the eligibility requirements carefully and make sure the loan is suitable for your investment needs.

Some lenders may have additional criteria for refinancers as opposed to new SMSF borrowers. It's important to check this before completing a full application.

You will also need to gather a lot of paperwork to support your application. While specific paperwork differs by lender it generally includes:

• SMSF Trust Deed
• Custodian Trust Deed
• Bank statements or audited financial statements

6 tips for refinancing an SMSF home loan

1. Check the terms and conditions. You should always read the fine print closely when making an important financial decision, and SMSF loans regularly come with a wide range of terms and conditions attached. These conditions can include everything from the minimum required amount of funds held in the SMSF to details surrounding the purchase of the property, so make sure you’re familiar with these conditions before you decide to refinance.
2. Don't forget the ATO requirements. According to ATO rules, refinancing the loan must not increase the amount you are borrowing against the property. The refinancing arrangement must be solely used to replace an earlier arrangement, and the trustee must not acquire legal ownership of the property while transferring to the new loan. It’s also worth noting that the loan cannot be used to ‘improve’ an asset, although repairs to a property are allowed. A range of other rules and restrictions apply to SMSF loans and all the technical jargon can get quite confusing, so seeking expert advice is recommended.
3. Look at the loan's interest rate. The interest rate that applies to the amount you borrow has a huge impact on the total cost of the loan, so compare interest rates offered by a range of lenders. What is the average rate on the market today? How much money could you save on repayments if you were to refinance to a loan with a better rate? Consider whether switching from a variable to a fixed interest rate (or vice versa) could be beneficial.
4. Factor in fees and charges. SMSF loans come with more fees than ordinary loans. Before switching, check what fees and charges apply to your current SMSF home loan and how do they compare to the charges on other loans? How much could you save in ongoing fees if you switched loans?
5. Calculate switching costs. When considering the potential financial benefits of refinancing your SMSF loan, you need to weigh up those benefits against the cost involved in refinancing. For example, check if discharge or break fees apply if you switch to a new loan. You’ll also need to consider the cost of setting up the new financing arrangement, including application, establishment and legal fees. Calculate the cost of refinancing your SMSF home loan.
6. Get help. Managing an SMSF investment strategy is a complex and involved process, so consider speaking to a specialist SMSF advisor. Getting professional advice tailored to your specific financial needs can be crucial to the success of your investments.

Setting up an SMSF home loan is a time-consuming process. SMSF loan applications take significantly longer to be processed than applications for ordinary home loans. There are several requirements that need to be met, such as choosing a custodian for the property. Refinancing may have many advantages for you, but the process takes time to complete.

You need to weigh up whether the time and effort to refinance the loan is worth it.

Looking to refinance? Compare your options now

Frequently Asked Questions

• What happens when you pay off your SMSF loan?

  Once your SMSF loan is fully paid off, the property's legal ownership is transferred to your SMSF directly. This means the loan's holding trust no longer holds the title of the property.

• How much does it cost to close a SMSF?

  Closing an SMSF can cost around $2,000, depending on the complexity. You will need to pay final tax returns, audits and administration costs to wind up the fund.

• Can I use equity in my SMSF to buy another property?

  You cannot directly access equity in an SMSF for another property purchase. However, you may be able to refinance or use other fund resources, subject to SMSF borrowing rules.

• What happens if you take money out of SMSF?

  Taking money out of your SMSF before retirement, unless under specific conditions, could lead to significant penalties. Withdrawals are typically only allowed under strict circumstances like financial hardship or meeting a retirement condition of release.