Refinancing your Self-Managed Super Fund (SMSF) loan can be a strategic way to optimise your fund’s performance and cut down on interest costs. As an SMSF trustee, finding the best refinancing deal can lead to significant savings, but it requires careful planning and research. With lenders offering various terms and interest rates, understanding how to secure the most competitive option for your SMSF can greatly improve your fund’s financial health.
In this guide, we’ll walk you through the essential steps to get the best rates when refinancing your SMSF loan, ensuring you make an informed decision that benefits both your immediate cash flow and long-term investment strategy.
1. Understand Why You’re Refinancing
The first step in refinancing your SMSF loan is understanding why you want to refinance. Knowing your goals will help you target the best rate and terms for your needs.
- Reducing interest rates: The most common reason is to take advantage of lower interest rates. Even a small reduction can result in significant savings over the life of the loan.
- Improving loan terms: Refinancing can also help you access better loan terms, such as a more flexible repayment schedule or removing restrictive loan covenants.
- Consolidating debt: If your SMSF has multiple loans, consolidating them into one can simplify your repayments and potentially secure a lower overall interest rate.
- Accessing equity for new investments: Refinancing could allow your SMSF to access equity for new property or asset acquisitions, further expanding your investment portfolio.
2. Research Current Market Conditions
Before committing to refinancing, it’s essential to research the current lending market. Understanding the landscape will help you gauge whether now is the right time to refinance your SMSF loan.
- Compare fixed vs. variable rates: Fixed rates offer stability, while variable rates can be more flexible but subject to market fluctuations. Depending on the economic outlook, one may be more advantageous than the other.
- Impact of RBA decisions: The Reserve Bank of Australia (RBA) regularly reviews interest rates, which directly impacts lending rates. Staying updated on RBA decisions can help you time your refinancing move for optimal savings.
3. Compare Different Lenders
SMSF loans are specialised products, and not all lenders offer competitive rates or terms. This makes comparing options crucial.
- Traditional banks vs. non-bank lenders: Traditional banks often have strict SMSF lending criteria, while non-bank lenders may offer more flexible options tailored to SMSF needs.
- Specialised SMSF loan providers: These lenders understand the unique challenges and opportunities of SMSF borrowing, making them worth considering for better rates and terms.
- Use of brokers: Engaging a finance broker who specialises in SMSF loans can save you time and money. Brokers can access a broader range of lenders and often secure exclusive deals.
4. Evaluate Your SMSF’s Financial Health
Lenders scrutinise your SMSF’s financial position when assessing a refinancing application. Ensuring your SMSF is in good financial health is key to getting the best rates.
- Strong investment portfolio: A well-performing investment portfolio within your SMSF shows lenders that your fund is financially stable and less risky to lend to.
- Liquidity and debt levels: Maintaining a good balance between liquidity and debt is crucial. Lenders prefer SMSFs that have a responsible debt-to-asset ratio and sufficient liquidity to cover future obligations.
- Overall asset performance: Regularly review your SMSF’s asset performance to ensure it’s optimised before applying for a new loan.
5. Optimise Your Loan-to-Value Ratio (LVR)
Your loan-to-value ratio (LVR) is a significant factor in determining the interest rate you’ll be offered. The lower your LVR, the more attractive your loan application will be.
- Lowering LVR: If possible, reduce your LVR before refinancing. This can be achieved by paying down the principal of your existing loan or increasing your SMSF’s super contributions to bolster your asset position.
- Impact on rates: Lenders typically offer better rates to SMSFs with lower LVRs because they represent less risk.
6. Consider Loan Features, Not Just Rates
While it’s tempting to focus solely on the interest rate, the features of the loan are just as important. Some loans come with features that can save you money in the long run or provide more flexibility.
- Offset accounts and redraw facilities: These features can help reduce the interest payable or give your SMSF access to funds when needed.
- Fees and charges: Don’t overlook hidden costs such as application fees, exit fees, or ongoing maintenance charges. Sometimes a loan with a slightly higher rate but lower fees can be more cost-effective.
- Loan terms: Ensure the loan term aligns with your SMSF’s long-term strategy. Refinancing into a loan with favourable terms can enhance cash flow and investment outcomes.
7. Negotiate with Your Lender
Many SMSF trustees don’t realise they can negotiate better rates and terms with their lender. Lenders want to retain good customers, so it’s worth asking for a more competitive deal.
- Leverage your SMSF’s financial strength: If your SMSF has a healthy financial profile, use this as leverage in negotiations.
- Broker support: Brokers can often secure lower rates through their relationships with lenders. They understand the market and know what concessions lenders may be willing to offer.
8. Factor in Refinancing Costs
While refinancing can lead to long-term savings, there are upfront costs involved that you need to consider.
- Valuation fees, legal costs, and break fees: These can add up quickly, so be sure to factor them into your decision. Understanding the break-even point, where the savings from a lower interest rate outweigh the refinancing costs, is essential.
9. Work with an Experienced Broker
An experienced broker can be invaluable when refinancing your SMSF loan. Brokers can help you navigate the complexities of SMSF loans, find the best rates, and negotiate favourable terms.
- Brokers’ role in identifying hidden fees: A good broker will help you avoid loans with hidden costs and find a product that offers true value.
- Access to a wider network: Brokers have access to a wider range of lenders, including non-bank lenders who may offer better deals for SMSFs.
Conclusion
Refinancing your SMSF loan can be a powerful tool to optimise your fund’s performance, but it’s crucial to approach it with the right strategy. By understanding your refinancing goals, researching the market, comparing lenders, and working with an experienced broker, you can secure the best rates and terms for your SMSF.
At AXJ Finance Brokers, we specialise in helping SMSF trustees refinance their loans and achieve better financial outcomes. Contact us today to discuss your refinancing options and take the next step towards a more financially efficient SMSF.