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Limited take-up of refinancing for related-party loans

aerial property smsf
Miranda Brownlee
21 June 2022 — 1 minute read

Despite many SMSF lenders offering competitive rates and terms compared with the ATO’s safe harbour terms, only a small number of trustees have looked to refinance their related party loans, according to an SMSF specialist broker.

Since 31 January 2017, SMSFs with a loan financed through a related party have had to ensure their loan is structured in line with the safe harbour terms set out in PCG 2016/5.

Alternatively, the SMSF would need to obtain evidence that the loan has been benchmarked against a commercial loan arrangement.

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SMSF specialist broker and managing director of SMSF Loan Experts, Yannick Leko, said while the safe harbour guidelines set out by the ATO were designed to replicate third party terms for a mortgage, there is quite a difference between these safe harbour terms and what’s currently being offered by commercial SMSF lenders at the moment.

“The interest rates are most definitely higher compared with what third party commercial lenders are currently offering,” he told SMSF Adviser. 

“Also, most commercial loan providers will offer 30 years for both residential and commercial SMSF loans. The 15 year term just does not exist in the real world.”

Despite some of the rates and terms being offered by commercial SMSF, Mr Leko said he is only seeing a small number of SMSF clients looking to refinance these loans.

“People tend to contact us about wanting to refinance through a third party lender in order to get that cash back out of super because they’ve got other plans,” he said.

“Other clients have been prompted to refinance their related party loan because the ATO has given them an order stating that the loan is not compliant and must be tidied up.”

Mr Leko said there is a lack of education in this area, with some trustees under the misunderstanding that they cannot refinance these types of loans.

The two recent interest rate hikes have triggered increased activity with SMSF loans in general, he said, with SMSF trustees reviewing their current loan with other options in the market.

“It's pushed people to have a look at some of the discrepancies between different lenders in this space. We have come across discrepancies in rates [between different lenders] as much as as 2 per cent. That can make a significant difference in terms of retirement outcomes,” said Mr Leko.

“The rate discrepancy between lenders is probably is probably bigger than it's ever been. People are slowly catching up on that. However, it is an education piece. We often speak to clients who didn't realise that they can refinance. There are all these assumptions that are floating around in the trustee community that are inaccurate.”

 

Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
Limited take-up of refinancing for related-party loans
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