Refinancing a home loan is a great way to find a better deal on mortgage interest rates or monthly repayments. By changing to a new loan, you can save thousands.
Refinancing a self-managed super fund (SMSF) may sound similar, but there are plenty of differences that are important to understand. In fact, the process itself can be a much more complex process than you first think.
This guide will take you through the basics of refinancing an SMSF loan in Australia and the benefits it brings to your finances.
To begin with, a self-managed super fund (SMSF) is a private superannuation fund. You can set them up yourself, with a maximum of six members. While your employer pays your superannuation guarantee into your SMSF, you’ll manage the investments in the fund. Strict rules and regulations apply to this arrangement.
An SMSF home loan is a loan that the trustees of self-managed super funds use to purchase a residential property or an investment property. The returns on investment - rental income or capital gains - are redirected into the SMSF. This helps to increase the members’ retirement savings.
Notably, refinancing an SMSF home loan involves a more complex process compared to a typical home loan. You must comply with the rules outlined by the ATO. If the application is not structured as per guidelines or is found non-compliant, it can attract huge fines exceeding $200,000.
When you take out an SMSF loan, it’s not taken personally by yourself. Therefore using a limited-recourse borrowing arrangement (LRBA) helps protect your SMSF and its assets. If you cannot repay or default on your loan, your lender cannot seize any of the other assets of your SMSF to recover their losses.
Just like any other home loan, you can refinance your current SMSF loan with whatever professional you have chosen to lend from. This process allows you to refinance for a lower interest rate or reduced monthly repayments, amongst other benefits your new lender offers.
Unlike other refinancing processes, however, you cannot release the equity of your property when refinancing an SMSF loan.
Nevertheless, the refinancing process should always be done to the ATO’s specifications. This is especially true when refinancing an SMSF loan between related lenders or from a bank to an affiliated lender.
There are several reasons why SMSF trustees may want to refinance their fund’s loan. Here are the most common reasons:
A better interest rate is one of the most common reasons for refinancing an SMSF loan. Your financial situation may have changed since originally taking on the SMSF loan. This means that you can and should look for a new SMSF loan with interest rates and repayments better suited to your current condition.
Moreover, you’ll likely have increased your equity in your investment residential property. With a significant amount of the loan paid off, you may get access to better interest rates than before. This will help you repay your loan faster while saving you thousands on loan repayments.
SMSF members should also consider refinancing their home loan to access flexible loan features and more favourable terms and conditions. For example, unlimited early repayments and free offset.
In addition to these reasons, your financial adviser will factor in your financial goals and offer expert advice. This will help you determine your goals for refinancing your SMSF loan.
Our Mortgage Calculator With Offset Account can help you calculate and compare the costs of refinancing your SMSF loan.
Since an SMSF loan is highly regulated and more complicated than a traditional home loan, knowing how to refinance your SMSF loan can potentially save you a lot of time, money and stress.
Here’s what you need to do:
Refinancing your SMSF loan can be challenging, with some pretty strict eligibility criteria for getting approved. These include:
You should organise the following documents for the application process:
Generally, when you refinance a home loan, there are several extra fees to budget for.
Refinancing an SMSF loan is no different. These fees generally include the following:
Once you have organised your paperwork in consultation with your refinancer, you should approach your current lender to ask for a release from your existing mortgage. Check if there are any early repayment penalties or other costs, as this will affect the costs associated with refinancing your SMSF loan.
Once you have organised the release from your existing mortgage, you are now ready to start the process of refinancing your SMSF loan.
SMSFs have to adhere to strict ATO requirements. Therefore, before you apply for a new SMSF loan, it’s essential to consider the following:
Refinancing SMSF loans can impact your monthly budget significantly. It would help if you considered the different costs from loan application to the settlement fee and ongoing fees. This will help you determine if SMSF refinance is a suitable, more cost-effective option than continuing in your current LRBA.
ATO conditions require you not to increase the amount you intend to borrow against the property when refinancing SMSF loans. Likewise, you cannot refinance and access equity to implement renovations on your property.
Ensure that you completely understand the rules and regulations regarding SMSF loans and property, lest you get into trouble with the tax office later.
Like most borrowers, you will rightly want a better deal when refinancing. Along with market research, calculating if refinancing to a new SMSF home loan with a fixed or variable rate is a money-saving option. Likewise, if you can potentially save money in fees by refinancing, it is an even sweeter deal.
SMSF loans have plenty of terms and conditions related to the minimum amount of funds needed in the SMSF, property purchase, and related aspects. Therefore, you must carefully read the fine print before signing the dotted line.
Before you refinance your SMSF loan, assess which repayment options are suited to your financial situation. For example, determine if switching to an interest-only repayment period to lower your monthly repayment amount matches your financial goals. Alternatively, check whether it makes sense to move to an SMSF loan with a shorter or longer loan term.
Refinancing an SMSF loan can take significantly longer than a typical home loan. It is important to consider if the benefits outweigh the time and effort spent organising the paperwork.
SMSF refinancing can be a complicated process because of the number of stakeholders involved and the unique circumstances of each case.
This process can be made easier through our Live Auction tool.
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The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.