SMSF loan interest rates
28 Oct 2021
If you’re among the 1.1 million Australians who are members of a self-managed super fund, you may be thinking about borrowing money to expand your fund’s investment portfolio. We look into the rates you could expect to pay on SMSF loans.
There are 597,900 self-managed super funds (SMSFs) in Australia according to the latest Australian Taxation Office (ATO) data, and between them they control retirement assets worth over $822 billion. If you have an SMSF, or are thinking of starting one up, the idea of using your retirement nest egg to invest in property may be appealing. But if you need to finance the property with an SMSF loan, it’s important to know what you could be up for in interest charges.
Can SMSFs borrow to invest?
SMSFs are able to borrow to invest in some circumstances, though strict rules apply. In particular, SMSF loans usually need to be ‘limited recourse borrowing arrangements’ (LRBAs). In simple terms, this means that if the SMSF defaults on the loan, the lender can only make a claim on the property the loan was used to purchase – the other assets of the SMSF are not up for grabs.
This arrangement can be reassuring to SMSF members, but it does mean more risk for lenders. For this reason, SMSF loan interest rates can often be higher than the rates on standard investment home loans.
What are SMSF loan interest rates?
Canstar has crunched the numbers, and found that for a variable rate SMSF loan, the average interest rate based on a sample of providers who list their rates online is 4.4% – that’s about 0.97 percentage points (pps) higher than the average investment home loan rate on our database.
This rate gap widens for fixed rate loans. As our table shows, the average 1-year fixed rate for SMSF loans based on our research is 4.68%, rising to 5.15% if you lock in the rate for five years. Across every fixed rate term, the average SMSF loan rate is at least two pps higher than our database average for standard investment home loans.
Bear in mind, the rates shown below are averages. So, it’s always worth comparing a variety of lenders to help you secure a competitive rate.
Difference in average SMSF loan rates and investment home loan rates
| SMSF loan – residential property | Investment home loan | Difference | |
|---|---|---|---|
| Variable | 4.40% | 3.43% | 0.97 pps |
| 1 year fixed | 4.68% | 2.59% | 2.09 pps |
| 2 year fixed | 4.72% | 2.51% | 2.20 pps |
| 3 year fixed | 4.85% | 2.60% | 2.24 pps |
| 5 year fixed | 5.15% | 3.10% | 2.05 pps |
Source: www.canstar.com.au – 19/10/2021. SMSF rates based on a sample of SMSF loans available for the purchase of residential property, with a loan of $500,000, principal and interest repayments and a 75% loan-to-value ratio (LVR). Investment home loan rates based on loans in Canstar’s database available for a loan of $500,000, with principal and interest repayments and a 75% LVR.
Which lenders offer loans to SMSFs?
Canstar’s researchers noted that over recent years, many of the big banks have withdrawn from lending to SMSFs. However, a number of lenders still offer loans to SMSFs to purchase an investment property. These include:
- Bank of Queensland
- Reduce Home Loans
- Freedom Lend
- Loans.com.au
- Heritage Bank
- Liberty Financial.
Each of these lenders has its own terms, conditions and SMSF loan interest rates. A common thread is that you may need a bigger deposit with SMSF loans than you would with a regular investment home loan. With some lenders for instance, you may only be able to borrow up to 65% of the value of the property being purchased, meaning the SMSF will need to stump up the remaining 35% as a deposit.
If shares are more your thing, NAB is one lender that also offers limited recourse margin loans to SMSFs, which can use them to invest in shares and other listed securities. But as NAB notes on its website, there are several risks associated with this type of product as well, including higher rates and the fact that SMSF fund members may be required to repay money to correct a margin call out of their own pockets.
How many SMSFs borrow to invest?
The total value of limited recourse borrowing arrangements across the SMSF sector has risen from $26.5 billion in 2016 to $56.9 billion in mid-2021, according to the ATO’s data. Despite this growth, a 2019 report by the Federal Government found only around 8.9% of SMSFs have an LRBA.
If you are thinking of borrowing to invest in property through your SMSF, good advice from a qualified professional is essential. This is a complex area, and the ATO has very specific rules around what your SMSF can do – and can’t do – with an SMSF loan.
Main image source: Billion Photos (Shutterstock.com)
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This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.
