Limited take-up of refinancing for related-party loans

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

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.”