When the COVID-19 pandemic hit, the volume of refinance applications surged as Australians reviewed their finances and looked to save money. But it’s not just owner-occupiers that can take advantage of record-low interest rates, SMSF holders can, too. We take a look at the opportunities for brokers.
For brokers with self-managed superannuation fund (SMSF) clients, knowing the ins and outs of limited recourse borrowing arrangements (LRBAs) is paramount. But while many brokers have been looking at the growing range of SMSF products available – particularly from non-bank lenders – there is one area of opportunity that needs to be kept in mind: refinancing.
With the official cash rate at record-low levels, now could be a good time to review the rates on an SMSF loan.
Speaking to The Adviser, Rocco Massaria, managing director of non-bank lender Your Manager, suggests that SMSF refinancing has the potential to generate much larger savings than regular home loans, due to the fact that SMSF rates – particularly from non-bank lenders – are now drastically down from the rates offered by banks.
While many SMSF loans might have interest rates starting with a 6, several non-bank lenders specialising in this space are currently offering SMSF loans starting from 3.99 per cent, he says.
Joanna James, the general manager of operations for non-bank lender Mortgage Ezy, therefore highlights that knowing which lenders are still offering competitive rates is key.
She tells The Adviser: “Those brokers that were quick movers offering SMSF loans have been penalised, as disgruntled clients come back to them to assist with the seemingly ever-increasing rates of their SMSF loans,” she says.
“Only then to be told by the bank’s BDMs that they no longer offer these types of loans.
“Clients then have to go to the branch, at which point the brokers lose their client and trail altogether. Being proactive and sourcing a cheaper and superior alternative keeps brokers on the front foot to enhance their reputations and build business going forward.”
She continues: “Often, huge savings can be made on interest rate costs by comparing the best lenders to the borrower’s current interest rates. In some cases, clients can refinance and save up to half their current costs,” she tells The Adviser.
“Clearly, lower rates can be used to pay down the loan earlier, compounding their savings, or the borrower may choose to lower their repayments and increase their capacity for other investments.”
Ms James put forward a recent example where a borrower was refinanced to Mortgage Ezy from one of the banks and saw their interest rate drop from 6.10 per cent to 3.99 per cent, saving $102,949. The GM of operations noted that not only did the client save money, but – with the additional monthly repayment of $491 – the proposed loan would be repaid in 18 years, as opposed to 25 years.
Similarly, Mr Massaria suggests that given an average SMSF loan is in the order of $500,000, he is frequently seeing brokers help save their customers around $9,000 per annum by refinancing.
He adds that June is a good time to be having these discussions with clients, as many SMSFs will already be engaging with their tax advisers ahead of the end of the financial year.
But, before anything, he highlights that it is important that brokers first ensure that there is a real benefit for the client to refinance.
He explains: “Look to the existing SMSF loans, and research their rates and fees and loan structure. You might be surprised by how much savings and benefits you can bring to your direct customers, or those of the SMSF planners and accountants customers. This is where you, as a broker, can shine.”
Another lender that has been specialising in SMSF refinancing is non-bank lender Better Mortgage Management (BMM).
In February of this year, the non-bank launched its new Aspire product range, which aims to offer “simplicity, interest rate predictability and flexibility with self-managed super fund residential and commercial property investment”, according to the non-bank lender.
It also comes with a 100 per cent offset account available for residential, as well as loans of up to 80 per cent loan-to-value ratio.
However, BMM managing director Murray Cowan emphasised that there are several rules governing SMSF loans, particularly the Superannuation Industry (Supervision) Act 1993, which brokers should be aware of before refinancing a loan, including that super fund trustees cannot borrow to improve an asset and cannot get “cash out”.
Mr Cowan adds that SMSF trustees can, however, refinance. And while cash out is not available, they can “include enough to cover the costs of the refinance”.
As such, he advises that brokers review the loans that their existing SMSF clients have, in consultation with their client’s accountant and/or financial planner.
Joanna James, general manager at Mortgage Ezy, suggests that brokers should ensure they review the small print of the SMSF loan before doing anything, as this can impact the cost savings.
She explains: “Check for hidden clauses, rates, fees, additional docs with the incoming lender.
“It is also worth checking for discharge fees and exit penalties as some lenders charge up to three months interest in the first five years.
“Also, ensure you input the correct running costs from the recent tax returns.”
As SMSF trustees will need to rely on their accountants and financial advisers for any kind of personal advice (or those with an Australian Financial Services Licence), brokers will need to work closely with these trusted advisers when handling the administration of the lending strategies.
Therefore, having a close working relationship with your client’s SMSF adviser is crucial.
“SMSFs are sold and serviced by accountants and financial planners, so developing good relationships with these professionals will have wider opportunities as a broker getting referrals,” Rocco Massaria, managing director or Your Manager, advises.
“If you have any existing customers with SMSF, perhaps ask who set their SMSF up and ask for a referral to that person.”
Self-managed super fund finance can be complex, so brokers should take time to learn about SMSFs if they aren’t across it already. As well as reading up on SMSF lending, brokers can also lean on the experience and learnings of professional lenders that specialise in this space, many of whom offer training courses on the subject.
“Get to know what can and can’t be done upfront by running scenarios past the new lender,” Mr Massaria suggests.
“It’s best to have a clear indication of what can be done to give the best experience for the customer.”
As with any loan product, getting to know the lender’s requirements and whether they have any unique selling points is key to knowing the benefits that they can deliver to you clients.
Ms James highlights that brokers should “look at their client’s full suite of options and ask questions” to whittle down their priorities and determine which lenders might be best suited.
Mortgage Ezy, for example, has a reduced paperwork option for refinances for clients who are not seeking additional funds and have “good conduct over the last two years”, which helps speed up the process.
“These types of promotions can often be lost in the plethora of lending options in this competitive market – don’t miss a hidden gem,” she says.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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