Refinancing a SMSF loan could save you a whole lot of money, but make sure you research your options before choosing the right loan for your financial situation.
Buying property through your SMSF (self-managed super fund) can be a sensible financial decision for many, as it allows you to acquire the home you want while boosting your superannuation property assets. But if you already have an SMSF loan in place, particularly one with a high interest rate, you may not be getting the best value for money.
The good news is that SMSF loans can be refinanced just like any other home loan, allowing you to secure a better deal. However, there are several important factors you need to take into account.
What are SMSF home loans?
If the trustees of an SMSF decide to invest in property, they’ll need to take out an SMSF home loan to access the funds they need. Purchasing property through your SMSF has been allowed in Australia since 2007. In 2011, the ABS revealed that 3.5% of SMSFs had invested in residential property and 11.4% had invested in non-residential property.
These loans are similar to an ordinary home loan but are more difficult to process, and each lender will have its own restrictions on how its loans can be structured and the purposes they can be used for.
You are typically only allowed to buy an asset through your SMSF using a limited recourse borrowing arrangement (LRBA), which means that lenders can’t seize any of your other SMSF assets if you default on an SMSF property loan.
Use our comparison tables to compare several SMSF home loans to get an idea of the fees and features they offer.
Why refinance an SMSF home loan?
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. For example, you might want to switch to a loan with an offset account to minimise your interest repayments, or you could consider a loan with terms and conditions that better suit your needs.
The SMSF loan market has grown substantially in Australia in recent years. Competition among lenders has increased and there are now many more options available to those shopping around for a better deal.
Regularly reviewing your loan and a range of other borrowing options available can help you save money and continue building a secure financial future.
Things to consider when refinancing an SMSF home loan
- 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.
- 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.
- Interest rates. 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.
- Fees and charges. 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?
- Repayment terms. Consider whether you could benefit from switching to a loan with an interest-only repayment period to minimise your monthly repayment amount, or perhaps one with a shorter or longer loan term.
- Benefits vs 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.
- Time consuming. 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.
- 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.