Having a Self Managed Super Fund (SMSF) is the ultimate expression of taking your future into your own hands, but too many Australians just assume that the property loan interest rate taken out via their SMSF under a Limited Resource Borrowing Arrangement is actually a good rate. Unfortunately, this means that too many people are stuck with high rates on their loans, unaware that the interest they are paying out is eating into their investment returns – whereas these dollars should be fattening up their retirements instead! You understand that managing an SMSF is as demanding as it can be rewarding. After all, investing with funds from a superannuation account can be one of the few ways to access funds that are otherwise locked away until you retire, and using those funds to generate additional capital is a sophisticated move. Provided you follow all the rules and act in the best interest of members, you can keep your concessional tax rates and grow your savings.
How did interest rates on SMSF loans get so high?
After the 2017-2019 Financial Royal Commission, many of the big banks ceased lending SMSF loans, where once they had been tremendously active. The biggest blow was by Westpac and all its subsidiaries—which includes St. George, Bank SA and Bank of Melbourne—announcing they will no longer lend to SMSF property investors. Other institutions to shun SMSF lending include ANZ, NAB, Commonwealth Bank and Macquarie. Although SMSF loans represented only a small portion of each bank’s overall lending portfolio, they were considered high-risk and therefore attracted high interest rates. The banks likely made this decision as a result of the increased scrutiny and regulatory pressure on lending practices following the Financial Royal Commission, which exposed numerous cases of misconduct and unethical behaviour by financial institutions in Australia.
Which Banks Have the Highest SMSF Loan Interest Rates
The Big Four banks’ cessation of SMSF mortgage approvals led to a halt in almost all competition, and internal refinancing came to a stop. Thus, these pre-existing “grandfathered” loans were left untouched without competition! Many such established loans have retained rates of up to 9%, which borrowers may not even be aware are well above the current market rate. From our point of view, this means that anyone holding a grandfathered SMSF loan with Westpac, ANZ, NAB, Commonwealth Bank, Macquarie, St. George, Bank of South Australia, and Bank of Melbourne should not postpone checking how much they are paying in interest!
“How can I climb out of this high-interest hole?”
Although setting up an SMSF loan was once a way to take control of one’s financial future, many Australians are currently experiencing the negative effects of being locked into high-interest rates on their grandfathered SMSF loans with the Big 4 Banks. While this situation is hindering their investment and returns, there is a way out.
Switching to a smaller lender who offers lower interest rates can help save money in interest payments and increase investment returns – but be aware – the lending criteria is stricter than ever. The process of refinancing an SMSF loan is lengthy, and involves a number of steps: researching different lenders and comparing their interest rates, fees, and loan features; gathering all necessary financial and legal documents; applying for pre-approval and submitting a formal application; completing a property valuation and arranging for a new loan contract to be drawn up; and finally, refinancing the old loan and paying off any outstanding balances.
If you find yourself in this position, ALIC’s financial professionals can provide guidance on the best options for refinancing, to help you understand the associated costs and risks, and ensure that you meet all the necessary criteria and regulations. Speaking to a financial professional is crucial and can ensure you are getting the most out of your loans so that you and the other members of your SMSF can enjoy a comfortable retirement.