Written

For

The

Australian

-

Why

self-managed

super

funds

are

trapped

when

it

comes

to

loans

Imagine locking in a home loan at under 5 per cent, then watching it climb above 9 per cent — with no ability to refinance. That's the reality right now for thousands of self-managed super fund trustees stuck in what I call "orphaned" SMSF loans.

Here's what happened. Around five years ago, after a spike in bad loans in regional areas and the fallout from the banking royal commission, the major banks quietly walked away from SMSF lending. St George, Macquarie and others stopped writing new SMSF loans — and just as importantly, they stopped caring about the customers they already had. No rate reviews, no negotiation, no interest in keeping you happy.

Fast forward to 13 rate rises later, and SMSF trustees are wearing every single one of them, plus any extra margin the lender feels like adding on top. One case I looked into with a Sydney mortgage broker showed a client's SMSF loan that started below 5 per cent now sitting north of 9 per cent.

The good news? The refinance door is starting to creak open again, with non-bank lenders filling the void the majors left behind. New SMSF loan rates are ranging from around 6.69 to 8.34 per cent depending on the lender and loan-to-value ratio. If you've built equity in your SMSF property and can drop below a 60 per cent LVR, the savings can be meaningful — though you need to weigh up establishment, valuation and legal fees that can run into the thousands.

One workaround some trustees consider is a related-party loan using their home loan redraw. But that strategy just got less attractive: from 1 July 2023, the ATO's minimum interest rate for related-party SMSF loans jumped from 5.35 to 8.85 per cent, with tax implications on the margin.

My take? The SMSF loan market is opaque and fragmented. This is one area where a good mortgage broker earns their fee many times over.