Are you wondering whether you can refinance your SMSF loan? Like any other type of loan, you can refinance your SMSF loan to get a lower interest rate and essentially save money on repaying the loan. But does this mean you should do it?
The Challenge of Refinancing SMSF Loans
You may choose SMSF loan refinancing for the same reasons you financed your home loan or other loans in the past. But be aware of the complexity of SMSF loans. Since taking out an SMSF loan is only possible under Limited Recourse Borrowing Arrangements (LRBAs), you have to ensure your loan refinancing remains compliant. Refinanced or not, SMSF loans that aren’t properly structured can lead to hefty fines. That can defeat the purpose of saving money on loan repayments.
What to Consider Before Refinancing Your SMSF Loan
Before deciding to refinance your SMSF home loan or SMSF commercial property loan, here are some things you must consider:
- ATO requirements: The Australian Taxation Office (ATO) states that the new or refinanced SMSF loan shouldn’t increase the amount you want to borrow against the property. Generally, you can take out a loan up to 80% of the property value, so loan refinancing should be lower than that amount. Also, ATO prohibits refinancing an SMSF loan to improve the property through major renovation projects, but necessary home or building repairs are allowed.
- Interest rates: Review your current home loan’s interest rate and see whether it’s fixed or variable. If you’re planning to refinance a fixed-rate loan, you might incur some hefty break fees, making your refinancing more expensive.
- Repayment terms: Be sure to look at the repayment terms. See if you could benefit from switching to a new SMSF loan with an interest-only repayment period for lower monthly repayment amounts. Also, consider whether you need to switch to a loan with a shorter or longer loan term.
- The total cost of refinancing: The SMSF loan refinance option comes with different costs. These include loan application fees, valuation fees, exit costs and other expenses necessary for the switch. Calculate these costs against your existing loan repayments. Refinancing is a strategic move if it’s more cost-effective than sticking to your current LRBA.
How to Refinance Your SMSF Loan
Does refinancing still sound practical after considering different factors? If yes, the next step is finding out whether your SMSF loan is eligible for refinancing. The eligibility criteria include but are not limited to:
- The new loan can’t be more or less than the current SMSF loan amount.
- The new loan has to have a loan term between 15 and 30 years.
- The existing SMSF loan has to be more than a year old with on-time repayments for the past six months.
- You should have 10% to 20% of the property value in liquid assets after the loan settlement.
As the fund trustee of your SMSF, you may have to present the following documents before you can refinance your existing SMSF property loan:
- SMSF trust deed
- Custodian trust deed
- Latest super fund statement before establishing your SMSF
- Fund income tax and regulatory return reports
- Other financial documents, including audited SMSF annual returns and income tax returns in the past two years
Talk to an SMSF Loan Expert
Refinancing an SMSF property loan is more complicated than a traditional mortgage refinancing. So it can take four to six weeks from loan application to settlement. That period may even take longer if you’re dealing with this alone. It’s best to talk to an SMSF loan expert to get better loan options and ensure you’re following ATO requirements. That way, you can keep your SMSF compliant throughout the process.