Many self-managed super funds that invest in property have done so with the aid of an SMSF loan. Using a loan to purchase an investment property can be a great way to diversify an SMSF’s portfolio. But, if the loan has a high interest rate, it can potentially hinder the performance and growth of your fund.

Fortunately, just as SMSF members have control over their super and its investments, they also have some control over their fund’s loan. This includes refinancing an SMSF loan if you’re not happy with your interest rate.

However, refinancing an SMSF loan can be a complex and daunting process. In this blog, we discuss why you may want to refinance your SMSF loan, what you need to consider first, and the steps you should take to start the process.

Why Should You Consider Refinancing an SMSF Loan?

There are many reasons why SMSF members may want to refinance their fund’s loan. But the prevailing reason for refinancing an SMSF loan is to obtain a better interest rate.

For example, maybe five years ago, you initially purchased your investment property with a 20% down payment. But now that you’ve made consistent loan repayments for 5 years, your property is 40% paid for. Now that your property is almost half paid off, you may be able to get a better SMSF loan rate than when you initially applied for the loan.

Another reason why SMSF members may consider refinancing an SMSF loan is to gain access to more flexible loan features. This includes more favourable terms and conditions such as unlimited early repayments and a free offset account.

Things to Take Into Consideration When Refinancing an SMSF Loan

While refinancing an SMSF loan can be beneficial for your fund, there are important factors to consider first:

• The SMSF Loan Interest Rate

The interest rate of the loan may be the first thing you consider when wanting to refinance your SMSF loan. In fact, it may even be the prevailing reason for your decision to refinance. This isn’t surprising, since the interest rate has a lasting impact on your loan repayments and thus, your super balance.

When considering different loans to switch to, it’s important to compare their interest rates with each other, and with your existing loan’s interest rate. Calculate the repayments you would need to make for each loan to see how much you could save if you switched.

Additionally, make sure you are aware of the average rate on the market at the time to ensure you are getting a fair deal.

• The Fees

The interest rate is not the only factor that impacts your super balance. When shopping for SMSF loans, it’s important to also consider the additional fees your super may have to pay. These may include annual fees and/or setup fees. Make sure you are well aware of any fees of all the SMSF loans you are considering, and how they compare to the fees of your current loan. Factors these fees into your calculations to see exactly how much could save with another SMSF loan.

Another way to take these fees into consideration is to look at the comparison and variable rate of the SMSF loan. Comparison interest rates take into consideration the fees associated with the loan plus the interest rate. This will give you a more accurate estimation of how much the SMSF loan will truly cost your fund.

• The Terms and Conditions

Aside from wanting a better interest rate, some fund members decide to refinance their SMSF loan for more favourable terms and conditions. Whether that is the case for you or not, carefully reading the terms and conditions of all the SMSF loans you’re considering is crucial.

It is very common for SMSF loans to have very specific terms and conditions your fund has to follow. These can be anything from how much funds your super needs to have to how often you can make repayments.

• The ATO Rules

While the ATO does allow you to refinance your SMSF loan, there are certain rules and regulations you need to follow. For example, when refinancing an SMSF loan, you cannot increase the amount you are borrowing. Your new loan must be for the same amount as your existing SMSF loan. Additionally, you cannot acquire legal ownership of the property during the process of refinancing the SMSF loan. This means the property needs to stay under your fund’s name, even when you refinance the loan. In order to prevent an audit of your fund and its investment, ensure your new SMSF loan is adhering to these rules and regulations set by the ATO.

How To Refinance Your SMSF Loan

While refinancing an SMSF loan is slightly similar to refinancing a home loan, SMSF loans are generally more complex. That’s why it’s important to work with an SMSF loan expert when refinancing your fund’s loan.

To refinance your SMSF loan with Squirrel, speak to an SMSF loan expert to learn more.