SMSF Refinance Loans

Refinancing an SMSF loan is more complicated than refinancing a regular home loan. Your reasons for doing so may be the same - such as finding a better interest rate or paying off your loan quicker - but the process of doing so requires some more legwork.

What is refinancing?

Before we dive into the complex process of refinancing an SMSF loan, let’s discuss what refinancing is in general. In a nutshell, refinancing is the process of switching from your current home loan to (hopefully) a better-suited home loan.

There are two types of refinancing: internal refinancing and external refinancing. Internal refinancing means you switch home loans with your current lender, and external refinancing means you are switching home loans to another home loan lender. Either way you go, the process is still called refinancing.

There are a few reasons you may wish to refinance your home loan. To name a few, you may want:

• To secure a better interest rate
• To pay less in ongoing fees
• To have a different interest rate set-up (fixed rate home loan, variable rate home loan, split rate home loan)
• To access the built-up equity in your home
• To access more features (such as offset accounts, redraw facilities, unlimited repayments, or another beneficial feature)

Your current home loan may not shape up when compared to something else on the market. If this is the case for you, refinancing could be a good idea. But you should weigh up all the pros and cons of refinancing before you pull the plug on your current home loan deal.

How is an SMSF loan different from a regular home loan?

To get some more context out of the way, it’s important to understand how an SMSF loan is different from a typical home loan. This should give you a better understanding as to why the process of refinancing will be a bit different through your SMSF even if you have refinanced your home loan before.

• An SMSF loan isn’t your regular home loan - it’s actually what’s known as a limited-recource borrowing arrangement (LRBA).
• If you were unable to repay your home loan for whatever reason, your lender is only able to access the security on your loan (i.e the home you purchased) to recoup their losses - not the other assets in the SMSF - hence their ‘recourse’ is ‘limited’.

Buying property through an SMSF is a whole can of worms, and the process of taking out a home loan is just one of those worms.

To briefly summarise why an LRBA is used when purchasing property through an SMSF, the main reason is it protects your SMSF and all of its other assets. Basically, the lender isn’t able to take any of your SMSF’s other assets, which protects the fund and its members' retirement plans.

For this reason, SMSF loans are inherently more risky than a regular home loan, both for you and your lender. If anything goes wrong and your SMSF is unable to make its loan repayments, the lender stands to lose a lot more than they would with a regular home loan. Additionally, if your SMSF runs into any cashflow problems, you are a lot more vulnerable.

As a consequence, interest rates on LRBAs are usually much higher than with regular home loans.

How do you refinance your SMSF loan?

As with anything SMSF-related, the process of refinancing your SMSF loan is a bit more complicated than your typical refinance situation. Firstly, you would need to find a new SMSF loan and/or lender to which to refinance. There are a few lenders that currently offer SMSF loans:

• La Trobe Financial
• Liberty Financial
• Bank of Queensland (BOQ)
• Switzer Home Loans
• Mortgage House
• Firstmac
• Freedom Lend
• loans.com.au
• LJ Hooker Home Loans
• Reduce Home Loans
• Regional Australia Bank
• Yard

Once you’ve found your new SMSF loan to refinance to, 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 should expect a longer turnaround time to refinance an SMSF loan.

Eligibility

Before you can apply to refinance your SMSF loan, you will need to make sure you are eligible to do so. With the riskiness of SMSF loans in mind, it’s no surprise that eligibility to refinance will typically be more strict than refinancing a regular home loan.

You will need to ensure you meet the following criteria to refinance your SMSF loan. Some of this may include:

• You can usually borrow up to 80% of the property’s value, so the entire cost of refinancing must be lower than this value. Some loans require 70% LVR, in essence a 30% deposit.
• The property will need to meet the SMSF loan criteria (i.e. be residential or commercial, location, size, and so on).
• You may need at least 10 to 20% of the property’s value in liquid assets post-settlement.
• You can’t borrow more than what is currently owing on your loan.
• Your loan term will usually need to be between 15 to 30 years.
• You must have had your current SMSF loan for at least six months and have been paying it off consistently.

Supporting documents needed

You’ll need to have a few documents handy to go along with your refinancing application, which may include:

• SMSF trust deed
• Custodian trust deed
• The latest statement prior to establishing your SMSF
• Previous two years of SMSF audited annual returns
• Two years of financial reports
• Two years of income tax returns
• Fund income tax and regulatory return

You may also need a letter from your accountant confirming the company trustee isn’t trading.

Fees

Refinancing in general usually incurs a number of fees, including a loan application fee and exit fee, but an SMSF loan means a few more costs to add to your tab.

Some of the fees you may need to pay to refinance your loan could include:

• Loan application fee: As mentioned, this is the cost of applying for a new loan
• Exit fees and/or a discharge fees: You may need to pay fees to leave your current loan
• Break costs: You may also incur a break cost if you refinance your loan within a fixed period (in this case, it may be better to wait until your fixed rate ends)
• Settlement fee: You may need to pay a fee to pay out your current SMSF loan, particularly if you are externally refinancing
• Valuation fee:You may need to have your property professionally valued before entering a new arrangement
• Government fees: You will usually need to pay a fee with your state or territory’s Land Titles Office to register your mortgage in the name of the trust
• Ongoing fees: You may also need to pay ongoing fees, such as annual or monthly fees, throughout the duration of your new loan

Things to consider before refinancing your SMSF loan

Before you get your affairs in order to apply for a new SMSF loan, there are things you should consider. It’s important that when you do refinance your SMSF loan, you do it correctly, as SMSFs are bound by strict compliance requirements by the Australian Taxation Office (ATO).

ATO requirements

The ATO requires you to not increase the amount you are borrowing against the property when refinancing your SMSF loan. For example, you can’t borrow 110% of the property’s value, and you also can’t refinance and use your equity to complete renovations or improvements at the property.

There are a lot of rules and regulations regarding SMSF loans and property, so it’s recommended that you speak to a financial adviser or SMSF adviser.

Terms and conditions

SMSF loans usually come with a lot of Ts and Cs that you should read over carefully before deciding whether it’s the right financial product for you.

Repayments

When switching over to another loan term, are you going to need to pay more in monthly repayments? Is it going to take your SMSF longer to pay off the loan? If so, will this impact the investment strategy and retirement plans of any SMSF trustees? If so, you may need to update your investment strategy, which is a legal document. You should consider these things and more before deciding to refinance.

Interest rate

In addition to the fees mentioned earlier, another big expense will be the interest rate you are charged. Is the interest rate on your new SMSF loan lower than what you are currently paying? Are the fees higher? Will you end up paying more or less over the life of your loan? You should factor in all fees and charges to make sure you are making the best financial decision for your SMSF.

Time

Refinancing an SMSF loan, since there’s a lot more legwork involved, can take anywhere from four to six weeks. You should consider whether the time, effort and resources it takes to refinance your SMSF loan outweighs the benefits you could reap.