Refinancing a private loan into a self-managed super fund

July 9, 2020

woman smiling after refinancing a private loan into a self-managed super fund

Self-managed super funds can be an attractive alternative to traditional public super funds for investors. Technology is giving people more access to knowledge that can help them make informed investment decisions, and more Australians are moving to manage their own retirement savings rather than trusting a one-size-fits-all fund.

One advantage of a self-managed super fund is that it can allow members to invest in residential properties using equity from the fund. However, this process can be trickier than a regular home loan. It’s important to regularly review loan conditions and consider when refinancing a self-managed super fund home loan as this may be able to maximise the retirement savings you will make.

In a self-managed super fund, members will have direct input into how their money is invested and how funds are allocated as long as investments are made in the best interests of all members. Self-managed super funds have to comply with the same legal requirements of regular super funds, like capital gains being invested back into the fund, and are even required to include a documented investment strategy.

While self-managed super funds have the flexibility to invest in a mix of shares, property and cash, they also have the advantage of being able to invest money where public super funds can’t, such as directly in residential real estate. They also tend to have lower fees than public super funds which charge fees based on the amount of capital invested. In comparison,  self-managed funds generally charge  flat-fees for advice and services instead.

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Many retirement planning experts suggesting a move towards more personalised super fund investment as these super funds can be tailored to meet an individual’s retirement goals. It could give you the ability to assess what your retirement goals look like and base your retirement saving strategies on achieving those goals.

Some benefits of a self-managed super fund include:

  • Being able to manage investment choices- All investments made by a self-managed super fund need to be done with the goal of providing funds for member retirement. This can be a good option for people with some investing experience. Being able to manage investments also means members can align their portfolio with their own social values.
  • Investing in a self-managed super can have considerable tax benefits- This depends on how your fund is taxed and you’ll need to understand this before trying to use investment strategy for tax purposes.

Using a self-managed super fund to finance your property can be a good way to achieve property goals while also boosting super fund benefits. For self-managed super fund loans, the loan for the property is taken out through the super fund and the property becomes part of the investment portfolio for the fund. Because of this, the property purchase must be for the benefit of the fund rather than for the benefit of the individual trustees. The property must also provide a return through rental income or capital growth that will be of benefit to the members of the fund when they retire. The fund members also cannot reside in the property until after retirement.

The fund will nominate a custodian or ‘bare trustee’ who will hold the property title on behalf of the fund until the loan is paid off.  The title can be transferred to the fund once the loan has been paid off.

Purchasing a property through a self-managed super fund also allows members to access equity from the super fund for property upkeep or renovations. This needs to be done specifically for the purpose of increasing the property’s rental market value.

Like refinancing any home loan, refinancing a home loan associated with a self-managed super fund is often done to secure better loan conditions. This could include a lower interest rate on the loan or more flexible features such as the use of an offset account or alternative loan terms. In a similar way to how you would review the performance of other assets and investments in your portfolio, you may want to regularly review and compare your loan terms to other lenders to ensure you’re maximising your retirement savings.

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Refinancing a home loan that is part of a self-managed super fund is a more complicated process than refinancing a normal home loan. Not all lenders will refinance a self-managed super fund home loan, and those that will may have some conditional requirements. All four major banks as well as AMP, Macquarie Band and St. George do not offer self-managed super fund home loans. While more options are available now, lenders do not traditionally want to compete on pricing for these loans.

Lenders consider self-managed super fund loans as  higher risk than other home loans because funds can typically only purchase assets using a limited recourse borrowing arrangements. This means that lenders can’t seize other assets of the fund if it defaults on the loan. Those lenders that are offering finance on self-managed super fund home loans are likely to be offering rates just above investment rates.

It can take 4 to 6 weeks for a self-managed super fund refinancing application to be processed. Providing the correct documentation upfront can help streamline this process. Be sure to provide certified copies of:

  • The SMSF trust deed.
  • Custodian trust deed.
  • The latest super fund statement prior to the establishment of the SMSF.
  • The last 2 years audited SMSF annual returns.
  • An accountant’s letter confirming the company trustee is not trading.
  • The last 2 years financial reports.
  • The last 2 years income tax returns on all related entities.
  • Fund income tax and regulatory return.

The lender will estimate the income of the self-managed super fund based on the past two years tax returns and consider whether the fund income alongside the rental income of the property will be sufficient to meet the repayments of the newly refinanced loan.

One of the biggest hurdles to overcome in securing refinancing on a self-managed super fund home loan is the large amount of existing equity required to secure the loan. Lenders will typically only lend 80 per cent of the property value, meaning the super fund needs to provide a full 20 per cent deposit to secure funding.

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On top of this lenders require up to a full 20 per cent of the property value left in the fund in liquid assets after calculating the costs of refinancing. Liquid assets generally refer to assets or funds that could be accessed within 3 days.

Some other things to consider before applying to refinance a loan are:  

  • Weigh up the benefits and costs: Other lenders may be willing to offer you better loan conditions but the costs of refinancing can include a range include. These may include loan application fees, exit fees, valuation fees, settlement fees, discharge fees, break costs, government fees to register and transfer the property, and ongoing fees.  
  • Consider the terms and conditions of the refinanced loan: Compare the interest rates being offered by different lenders and the conditions that they may be attaching to their offer. Switching loans may mean considering a variable interest rate compared to a fixed rate or accepting different repayment terms. It is likely that loans will include conditions such as a  minimum required equity in the SMSF or have criteria for type of property eligible for the loan. Whether these conditions benefit you may be dependent on how close you are to retiring.   Speaking to a financial adviser about your retirement goals and establishing a savings strategy can help define which loan is best suited to your situation.  
  • The process of refinancing can be time consuming:  Applications take longer to be processed than ordinary home loans, and the fulfilling the necessary requirements of the loan can take time. For instance, the process of nominating a custodian for the property can prolong the process of refinancing.

Managing a self-managed super fund can be a complex process. If you are having difficulty or are uncertain about your investment decisions, contact eChoice today as our experienced brokers may be able to assist. 

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Words by Danielle Austin


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