Earlier this month, the Reserve Bank of Australia raised the cash rate by 25 basis points up to 35 basis points and has signalled that there will be further hikes ahead.
In announcing its decision, the RBA stated that the economy has proven to be resilient, and inflation has picked up more quickly, and to a higher level, than was expected.
“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions,” it stated.
SMSF Loan Experts founder and managing director Yannick Ieko said the RBA made it clear when they announced the rate rise that more rate rises are on the way.
“It is expected that the cash rate will rise to 1.5 per cent by the end of the year and will reach 2 per cent by mid-next year,” said Mr Ieko.
He noted that this is the first rate rise in over 11 years and many people with SMSFs have never experienced a rate rise.
“In fact, only 55 per cent of current SMSFs have been in existence for over 10 years. These people may have some experience in dealing with rate rises however more recent SMSF trustees probably won’t,” he said.
The first step that SMSF trustees should be taking, according to Mr Ieko, is to review what their interest rate actually is.
“We have been living with such low rates for so long that a large number of people have become quite complacent and have lost touch with their actual rate,” he said.
“Undertake a review of your interest rate for your SMSF loan. Review the fees and charges. Get a good sense of what your situation is and then act.”
Mr Ieko said SMSF trustees would also need to assess their income and expenses.
“An increase in interest rates means that the SMSF will have to find more money each month to pay for the increased repayments,” he said.
“Look at ways to increase cashflow through increased rents, reducing expenses, or even adding more equity to the SMSF by selling assets, adding another member to the fund or considering salary sacrificing.”
It may also be a good time to review the asset allocation, he said, and identify any assets that should be disposed.
“While these things should be considered on a regular basis, sometimes triggers such as an interest rate rise gives us the catalyst to take action. In any event, I’d recommend to trustees to speak to their advisers,” said Mr Ieko.
