If you are paying over 7% interest on your SMSF loan, a refinance should be at least part of your strategy over the coming months.
With the refinance revolution that is capturing Australia at the moment, the SMSF loan has been unceremoniously left out. Why? Because it doesn’t effect our day to day. But like any cost that is superannuation related, it can erode your nest egg..
We have seen clients paying 8 or 9 % on their SMSF loans. Many of these are legacy products that are no longer offered by banks and lenders, hence they are neglected and expensive. By switching to a more appropriate product, you could save thousands.
On a $500,000 loan, a 1% saving can save your superfund $5,000 per annum in interest payments.
Over a 30 year loan, that’s $150,000 in savings.
That 30 year saving invested at 8% per annum is an opportunity cost of $566,416 (using simple compound interest)
So, 1% off your interest rate can convert to an $566,416 opportunity cost
Purchasing your property within your SMSF can be one of the more stressful transactions one can engage in, but the refinance, I can assure you, is much simpler.
It is a pretty simple trade off, with the above example, about 1 hour of your time spent gathering documents for your broker could give you a $566,416 bump to your retirement savings. The advantage is simple.
With every transaction, it is important to talk about the cons or the risks involved. Some legacy products have break costs, however, when compared to the upside savings, that would have to be one hell of a break cost to offset the gains. Your financial situation may have changed, making it harder to refinance, but again, no harm in trying.
The following steps are the typical approach:
1. Contact your accountant or current lender and ask:
“What is my SMSF(LRBA) loan interest rate? Is it above 7%? Then go to step 2
2. Call your Mortgage Broker (or us!) and ask:
“Get me a list of SMSF loan rates that are cheaper than mine. Be sure to include:
Interest rate
Ongoing Fees
Switching Fees
3. Gather the information and documents needed OR direct your accountant to provide them
The following information will be required among others:
Approximate property Value
Loan amount
The following documents will be required among others:
Trust Deed
Bare Trust Deed
SMSF Returns
SMSF Bank statement
4. Have your broker crunch the numbers and provide a solution
Compare the savings with fees etc taken into account. Enter those dollar savings into a compound interest calculator to get a real idea as to how much you are not only saving, but earning off those savings i the coming years.
6. Decide how to invest your savings !
Please don't hesitate to get in touch with us for a comparison, or give us permission, and we can reach out to your accountant directly.