Beware of hidden costs in refinancing SMSF loans, warns adviser
Self-managed funds are being warned to check out the fine print before taking out or refinancing a loan as there may be exit fees that wipe out any savings that may be made on interest rates.
Aaron Dunn, CEO of Smarter SMSF, said on the latest SMSF Adviser podcast that rising interest rates are now starting to hit SMSF loans with some hitting the 10 per cent mark.
“Obviously SMSFs have property investment loans, and their properties are seeing a big impact on those with those increasing repayments,” Mr Dunn said.
“The worst hit are seeing their rates as high as 10 per cent now.
“This is, of course, is a by-product of the financial regulator review that we saw a few years ago, because what we’ve seen is, of course, the major banks come out of the SMSF loan space.
“And in essence, we’ve got second-tier lenders in there, and they’re getting their money from the banks as well, so we have some legacy products in the marketplace and a whole range of current providers that are then obviously impacted via the increase in the rate changes we’ve seen in recent times.”
Mr Dunn said even when interest rates were sitting at two and three per cent for a home loan, at that point in time SMSF loans because they are linked to investor loans were sitting at five per cent and even as much as six per cent.
“We’ve seen this really quick shift to amounts and SMSFs having to pay in the eights and nines and even 10 per cent,” he said.
“Even a related-party loan, where the fund has to comply with the safe harbor rules, [will likely go up]. We don’t have the figure for the May 2023 rate, which will apply for 2023–24, but we do know that the APR rate is already sitting at 8.6 per cent.
“So we’re going to see loans on a safe-harbor, or related-party loans that are currently rolling through at 5.35 per cent, potentially could go as high as at least 8.6 per cent and potentially higher.”
Mr Dunn said this increase in rates in the SMSF space may mean some products entering the market have a lower rate, but there may be fees attached to these that negate their savings.
“I’m already hearing of discussions around low rates but there are fees attached,” he said.
“You need to look beyond the headline rate and really understand that you know what all of the costs are that sit inside the fund, and that you don’t end up having to pay a $2000 fee to break the loan as part of a refinance process.
“Dropping 1.5 per cent in interest rate may sound good but if you’re going to get stung pretty hard on some of the other entry-exit rules and other maintenance costs that sit with some of these other providers it may not be worth it.
“The short answer is, do your homework, understand all the costs, but actively be looking at refinancing at this point in time, because there will be some competition in the marketplace if you’re paying interest rates as high as 10 per cent.”
