Refinancing an SMSF loan is not like refinancing a regular home loan. While your reasons for wanting to refinance may be the same, such as finding a lower interest rate or switching to better terms and conditions, the process can be a lot more complex.
Before we dive into the specifics of SMSF loan refinancing, let's be clear on what refinancing entails. As with any loan type, refinancing is the process of switching from your current loan to another loan. This can be done by taking out a different loan with your current lender (internal refinancing) or switching to a loan with another lender (external refinancing).
How does an SMSF loan differ from a standard loan?
The main difference is that an SMSF loan is held by a superannuation fund under a limited-recourse structure, whereas a standard loan is held by an individual with full personal liability.
See also: A guide to SMSF borrowing
Essentially, this means that unlike a standard home or investor loan, lenders have no right to seize the SMSF's other assets to recoup losses on the loan. This rule is applied to protect the retirement funds of all members.
For lenders, it means SMSF loans are riskier than a standard home loan which is why not all lenders deal in them, and why interest rates are generally higher than for a standard home or investor loan.
For borrowers, if the SMSF runs into difficulty in meeting the loan repayments, you aren't able to make personal contributions to repay the loan. All repayments must come from the SMSF. These are some of the reasons why applying for an SMSF loan can be more complex and take longer to process than a standard home or investor loan. It can also add another layer of complexity to refinancing.
When to refinance an SMSF loan
Just like any other loan, there are multiple reasons why you may seek to refinance an SMSF loan. You may want to:
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secure a better interest rate
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pay less in ongoing fees
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have a different interest rate set-up (fixed rate loan, variable rate loan, split rate loan - note: not all SMSF lenders offer a split rate option)
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access more suitable loan features such as offset accounts, unlimited repayments, or other beneficial features. (Note: SMSF loans are not permitted to offer redraw facilities by law.)
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ensure the SMSF loan best serves the fund's overall investment and tax strategies
What are the rules around SMSF refinancing?
Unlike refinancing a standard home or investor loan, you cannot release equity in an SMSF refinance, nor can you increase the amount borrowed. This is prohibited under Australian superannuation law.
The only exception in differing the existing loan amount is when the SMSF is borrowing additional money for minor cosmetic work or maintenance (not renovation) to bring the property up to rental market standard. If you wish to borrow extra, your lender will need to be satisfied this is the case and will generally require quotes for the work to be undertaken.
It can be worthwhile seeking advice from a specialist SMSF legal, tax, or financial advisor to ensure you are clear on what is permitted.
As with any loan, you should also weigh up all the pros and cons of refinancing before you pull the plug on your current loan.
How to refinance an SMSF loan
Even if you've refinanced a standard home or investor loan before, the process of refinancing an SMSF loan is not as straightforward.
Just as buying property through an SMSF entails a few more steps, so too does refinancing an SMSF loan but it can certainly be done.
First up, you need to do your market research. It's always a good idea to start with your current SMSF lender to see if it can meet the rate, terms, or conditions you're looking for and how much it may cost you. If it's not as good as what's on offer elsewhere on the market, you need to identify a new SMSF lender and a loan product that meets your needs.
There are more than a dozen lenders in Australia that currently offer SMSF loans, including:
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La Trobe Financial
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Liberty Financial
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Bank of Queensland (BOQ)
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Switzer Home Loans
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Mortgage House
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Firstmac
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Freedom Lend
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loans.com.au
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LJ Hooker Home Loans
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Reduce Home Loans
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Regional Australia Bank
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Yard
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Bluestone Home Loans
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WLTH
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Greenline Home Loans
Once you've found an SMSF loan you think will best meet your needs, the lender will need you to jump through a few more hoops before you can sign any paperwork.
You will need to meet eligibility requirements, supply your supporting documents, pay more fees, and once these are submitted, you can expect a longer turnaround time than for a standard home or investor loan refinance.
Eligibility
Before you can apply to refinance your SMSF loan, you will need to ensure you are eligible to do so. Again, eligibility to refinance will be more stringent than refinancing a regular home or investor loan.
Typically, you will need to ensure you meet certain criteria to refinance your SMSF loan. Here are some of the common requirements:
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You can generally borrow up to 80% of the property's value for an SMSF loan. But when refinancing, the entire cost of the refinance must remain within the allowable LVR. Some SMSF loans require 70% LVR, in essence a 30% buffer. That means if the property has moved in value since the SMSF purchased it, this may impact the LVR, as can including the entire cost of refinancing in the loan amount.
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You can't borrow more or less than what is owing on your current SMSF loan. This is an ATO requirement around SMSF refinancing. The only exception to borrowing more is if minor cosmetic work or maintenance is required to bring the SMSF's property up to rental standard. The lender will need evidence this is the case.
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The property will need to meet SMSF loan criteria (i.e. be residential or commercial as well as meet lender benchmarks concerning location, size, property type, usage, etc.)
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The SMSF will need to have at least 10 to 20% of the property's value in liquid assets post-settlement. Each lender will have different liquidity requirements. These are to protect the lender's interests should the fund face any unforeseen expenses after settlement that could affect its ability to make repayments, such as the property becoming vacant or needing repairs.
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Your loan term will usually need to be between 15 to 30 years.
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You must have had your current SMSF loan for at least six months - some lenders will require a year - and have been paying it off consistently and on time.
Supporting documents needed
You'll need to have a few documents handy to accompany your refinancing application, which may include:
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SMSF trust deed
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Custodian trust deed
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The latest statement prior to establishing your SMSF
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Previous two years of SMSF audited annual returns
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Two years of financial reports
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Two years of income tax returns
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SMSF income tax and regulatory return
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Letter from your accountant confirming the company trustee is not a trading company.
Fees
Refinancing a home or investor loan can incur a number of fees but refinancing an SMSF loan may entail a few more costs.
Some of the fees you may need to pay to refinance your loan could include:
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Loan application fee: This is the cost of applying for a new loan
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Exit fees and/or a discharge fees: You may need to pay fees to leave your current loan
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Break costs: You may also incur a break cost if you refinance your loan within a fixed rate period. (You'll need to determine whether it may be better to wait until your fixed period ends.)
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Settlement fee: You may need to pay a fee to pay out your current SMSF loan, particularly if you are externally refinancing
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Valuation fee: You may need to have your property professionally valued before entering a new arrangement
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Government fees: You will need to pay a fee with your state or territory's Land Titles Office to register your mortgage in the name of the trust
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Ongoing fees: You may also need to pay ongoing fees, such as annual or monthly fees, throughout the duration of your new loan
You may also need to pay fees for advice from any legal or tax professionals to review the SMSF to ensure its structure complies with superannuation industry regulations and that refinancing meets permitted requirements.
Things to consider before refinancing your SMSF loan
Before you get your affairs in order to apply for a new SMSF loan, there are several factors you should consider. It's important that when you refinance your SMSF loan, you do it correctly as SMSFs are bound by strict compliance requirements.
ATO requirements
The ATO sets down strict guidelines surrounding SMSF refinancing including the requirement that there can be no increase in the amount borrowed, except in the very limited and specific circumstances already covered. It is worth consulting a specialist SMSF advisor to ensure the fund is meeting all the rules before deciding whether to refinance.
Terms and conditions
SMSF loans usually come with many terms and conditions. You need to ensure the loan you're refinancing to is the right product for your needs and you are aware of all that's entailed.
Investment strategy impact
You will need to consider whether switching over to another loan will impact the SMSF fund's all-important investment strategy. In some cases, you may need to update your investment strategy, which is a live legal document. Again, it's worth seeking specialist advice before you decide to refinance to be clear on whether refinancing meets your stated investment strategy or whether updating is required.
Interest rate and repayments
In addition to the fees, any new interest rate or variation in repayments could have an ongoing effect on your SMSF's finances. It may be that you end up paying more or less over the life of your loan, or that the term may be longer or shorter. These are factors that could affect the fund's other commitments, plans, and overall investment strategy. This needs to be considered before proceeding with refinancing.
Time
Refinancing an SMSF loan can take anywhere from a few weeks to a few months, depending on the lender and the complexity of the loan. You'll need to consider whether the time, effort and resources it takes to refinance your SMSF loan could outweigh the benefit it will bring.
