Interest rate rises could see funds decide between selling or refinancing
Despite economic and financial specialists predicting a sell-off of assets due to interest rate rises, one of the SMSF sector’s most experienced experts says he doesn’t see real property assets flooding the market anytime soon.
David Busoli, principal of SMSF Alliance, said there could be a spate of refinancing as funds renegotiate rates amid the increase to related-party limited recourse borrowing rates under the safe harbour provisions.
“I don’t believe the increase will have much effect on sales, but I do believe that refinancing will increase,” Mr Busoli said.
While the RBA stalled rate rises in August, pundits still believe the central bank will again set another increase in the coming months if inflation does not cool enough.
According to the ATO, loans account for around seven per cent of SMSF assets, with commercial and industrial property being twice as popular as residential. About 16 per cent of the funds borrow $500,000-$1 million, which suggests there is also strong demand for residential property.
According to a tax consultant at BDO, the increase in rates of related-party loans could see SMSFs consider switching to commercial loans from banks or other lenders.
Mr Busoli said related-party loans will have a maximum loan-to-value ratio under the safe harbour provisions of 70 per cent so he expected that most funds would “be receiving enough rent to cover the interest rate rise”.
“In any case, these funds are generally in the accumulation phase, so members are making ongoing contributions which add additional liquidity to the fund,” he said.
“It’s a different kettle of fish if you’re looking at the $3 million super tax proposal on unrealised gains.
“This would be an additional impost on the fund that has not been considered or factored in so there could be mortgage stress under that situation which could see some SMSFs having to sell up their direct real property.”
Although institutional refinancing is an option, Mr Busoli said there are fees that would have to be considered and funds would have to decide if the cost-benefit ratio was worth the effort. “Refinancing would probably cost more in the first year, but provided it is still at a 70 per cent LVR it could be worthwhile,” he said.
“Where you have a problem is if there has been a dip in the property market and the ratio is outside the norm.”
“The bigger risk is if you can’t find a tenant. If you have a residential property it may be easier, but if you have a commercial property, affected by different working patterns post COVID, it could be a lot more difficult and be far more worrying than a two per cent rise in the interest rate.
“If the SMSF has no choice but to sell the property at a loss the fund’s liability is limited to the loan. This could be a solution for related party loans but might be more problematic for institutional loans if members have given personal guarantees.”
