Getting a loan for a self-managed super fund (SMSF) can be complex. This guide will help you understand more about SMSF fixed-rate loans for property or asset acquisition.
Can SMSFs Get Fixed Rate Loans?
Yes, self-managed super funds can secure fixed-rate loans, depending on the lender. Fixed-rate options are offered alongside variable-rate ones for SMSF loans, each with advantages and disadvantages based on the SMSF’s financial goals and the broader market conditions.
Let’s take a closer look at SMSF loans in general.
What is an SMSF Loan?
An SMSF loan helps self-managed super funds buy real estate. It operates under a particular legal setup called a Limited Recourse Borrowing Arrangement (LRBA).
In this arrangement, the SMSF borrows money from an outside lender to buy an asset such as property. This asset is then held in a separate trust until the loan is repaid. This ensures the lender cannot access any of the funds other assets in the case the borrower defaults on the loan. It’s different from a typical mortgage due to the unique structure of the LRBA, which accommodates the specific rules governing SMSFs. The loan is in the name of the SMSF, not the individuals who manage or are members of the SMSF.
Because SMSF loans are inherently more risky for the lender, they generally have higher interest rates when compared to regular loans.
Fixed rate SMSF loans explained
A fixed rate SMSF loan is a type of loan where the interest rate remains constant for a specified period, regardless of market changes. This loan is taken out by a self-managed super fund (SMSF) to invest in property.
How is it different from a typical fixed-rate loan or mortgage?
While fixed-rate SMSF loans and regular fixed-rate loans or mortgages have similarities in their fixed interest rate feature, they differ in several key areas due to the distinct structure and purpose of SMSFs.
Here are some points of difference:
|Typical Fixed Rate Loan||Fixed Rate SMSF Loan|
|Borrowing entity||Borrowed by individuals or business entities.||Borrowed by the SMSF, a trust established for the sole purpose of providing retirement benefits.|
|Loan Structure||Standard legal and financial structure.||Facilitated by a Limited Recourse Borrowing Arrangement (LRBA), which means the lender’s recourse is limited to the asset purchased, protecting other fund assets from creditors.|
|Asset Ownership||The borrower directly owns the asset.||The asset is held in a separate trust until the loan is paid off, at which point ownership transfers to the SMSF.|
|Repayments||Repayments are generally made from the borrower’s income or other financial resources.||Repayments are made from the SMSF’s cash flow, which can include contributions made to the fund, rental income from the property, or other investment returns.|
|Regulations||Subject to standard lending laws and regulations.||Subject to additional regulatory requirements due to the SMSF structure, including compliance with the Superannuation Industry (Supervision) Act 1993 and other relevant laws and regulations.|
|Tax Implications||Tax implications are based on individual or business circumstances.||Tax implications are tied to the superannuation environment, which can offer tax benefits but also requires strict compliance with tax laws.|
Pros of Fixed Rate SMSF Loans
The fixed interest rate makes the repayment amounts predictable, which can be especially beneficial for budgeting and financial planning within the SMSF.
Protection against rate increases
If the market interest rates increase, the fixed rate on the loan remains the same, potentially saving the SMSF money over the term of the fixed rate.
With a fixed interest rate, budgeting becomes simpler as you know the exact amount required for loan repayments over the fixed term.
Cons of Fixed Rate SMSF loans
Fixed rate loans may have restrictions on making extra repayments or paying off the loan early without incurring additional fees. This could be a downside if the SMSF obtains extra funds it wishes to use to reduce the loan balance.
Missed opportunity on rate drops
If market interest rates fall, the fixed rate on the loan remains unchanged, which could result in higher repayment costs compared to a variable rate loan.
Early exit fees
Existing the fixed rate loan before the end of the fixed term might incur substantial fees which could outweigh the benefits of switching to a different loan product or lender.
Fixed rate loans may offer fewer features like offset accounts or redraw facilities compared to variable rate loans, which might provide more financial flexibility.
Contact us today, or schedule a phone meeting with an SMSF Loan Expert to make sure you get the right SMSF lending guidance.