With the Reserve Bank of Australia having recently effected its 8th rate rise, many self-managed superannuation fund trustees are looking at whether now is the time to refinance their SMSF loan.
Should you be too? Refinancing your SMSF loan doesn’t need to be an exercise filled with uncertainty or confusion. As specialists in SMSF lending, we are happy to provide you with answers to the most commonly asked questions about SMSF loan refinancing.
Why do people refinance SMSF Loans?
Like property investors and homeowners outside the SMSF landscape, many SMSF owners look to refinance their SMSF loan to source a better interest rate or access cost savings on the loan. Also, similar to a traditional home loan on the open market, different SMSF loans come with different features. Especially in dynamically changing times, loan holders seek flexibility in their loan products, such as low or no-fee offerings or the ability to repay the loan early without penalty.
Investment and tax strategies
Many SMSF owners work with financial advisers and tax practitioners to use the borrowing against an investment property within their self-managed super fund as part of their overall wealth strategy. In some instances, particularly for SMSFs who’ve held their investment property for several years, the current interest rate market could mean that their property has gone from being positively to negatively geared. This may not necessarily represent a negative shift, but it could represent an opportunity to review your situation to ensure it remains on track with your SMSF investment strategy.
Eligibility to refinance an SMSF Loan
More strict approval requirements exist for refinancing an SMSF investment loan over a traditional mortgage. This is because borrowing money to invest within a self-managed super fund can only be done through a limited recourse borrowing arrangement (LRBA). Limited recourse borrowing arrangements are more complex than lending on typical home loans.
Loan-to-value ratio (LVR)
The LVR on can go as high as 90% when purchasing residential property with your SMSF. The refinance of your SMSF loan must remain within the allowable LVR. If the property has moved in value, this could impact the LVR. Also, the entire refinance cost is factored into the loan amount, which can also affect the LVR.
Each lender will set a different benchmark on liquidity requirements before approving an SMSF loan. The application may not meet the lending criteria if you don’t have enough liquid assets left in your SMSF after factoring in the refinance costs.
Generally, loan terms need to be between 15 and 30 years.
The loan amount you apply to refinance your existing SMSF loan with can’t be more or less than the current SMSF loan amount. This forms one of the ATO requirements around self-managed super fund refinancing.
It’s common for lenders only to offer refinancing on SMSF loans that are more than one year old. Furthermore, it’s common for lenders to only look at loans with six months’ on-time repayments.
Lenders may have different preferences when refinancing loans over residential vs commercial property, such as the property type (warehouse, factory, office unit) or location (regional or metro).
Can I use the equity in my SMSF property during the refinance?
While the Australian Taxation Office usually sets the rules around SMSF lending, its superannuation legislation which states you cannot release any equity in your property value during the SMSF refinancing process. Many SMSF owners want to purchase residential property within their SMSF and use the rental income to cover the loan repayments.
Understandably, to attract the highest rental yield, you may see refinancing as a good opportunity to improve the investment property. The only exception to the super law on effectively borrowing additional money to modify the property is where the funds are required for minor cosmetic work or upkeep to bring the home back up to the market rent standard.
If this is the case for your SMSF, then you can expect the lender to control the release of the funds and require quotes for all the work to be undertaken.
What do I need to provide in my SMSF loan refinance application?
More documentation is required to submit an SMSF home loan refinance application than a typical home loan refinance.
The required documents could include:
- – A letter from your accountant confirming that the company trustee is not a trading company.
- – Your custodian trust deed and SMSF trust deed.
- – Two years’ worth of audited SMSF annual returns, financial reports and income tax returns of all related entities.
- – The fund’s regulatory and income tax return.
What are the costs involved in refinancing an SMSF loan?
While one of the benefits of refinancing your SMSF loan is to potentially save money, the entire cost of the refinancing process must be factored in. Some of the fees and expenses you may incur include:
- – Break costs for refinancing within a fixed term.
- – Loan application fee.
- – Settlement fee.
- – Ongoing fees for the loan product.
- – Exit fees.
- – Valuation fee.
- – Government fees for registering the new mortgage in the name of the SMSF trustee.
You may also incur additional fees from any legal or tax professionals to review the SMSF to ensure that its structure complies with the Superannuation Industry (Supervision) Act 1993 (known as the SIS Act).
Is it difficult to refinance self-managed super fund loans?
Just because refinancing your SMSF loan is a more complex process than refinancing a home loan doesn’t mean it needs to be difficult. By understanding your eligibility and providing all the required documentation up front, you can make the process as efficient as possible and increase your chances of getting approved.
At SMSF Loan Experts, our expertise makes setting up a new SMSF loan or conducting an SMSF refinance straightforward. Whether your fund holds a residential or commercial property, contact our team to understand more about your eligibility to refinance your SMSF loan.