There are more than 500,000 self-managed superannuation funds (SMSFs) in Australia, looking after the retirement savings of more than 1 million Australians. And borrowing via a SMSF for investment is becoming increasingly popular with the June 2016 ATO quarterly statistics showing that the dollar value of SMSF lending has increased to more than $21.8 billion.
SMSF loan interest rates
SMSF loans are generally written as a Limited Recourse Borrowing Arrangement (LRBA), which means that if the loan defaults, the lender is limited to seeking compensation via the specific asset bought with the loan. This means there is no recourse to the other assets held in the SMSF.
Canstar’s research of the SMSF loans offered by 15 providers has found the following minimum, maximum and average SMSF loan interest rates.
|Table: SMSF Loans – Interest Rates 2016|
|1 Year Fixed||5.42%||4.84%||6.20%|
|2 Year Fixed||5.32%||4.59%||6.20%|
|3 Year Fixed||5.38%||4.59%||6.20%|
|5 Year Fixed||5.62%||5.09%||6.20%|
Source: www.canstar.com.au. Advertised interest rates are as at 1/10/2016. Based on loan amount of $350,000 and 70% LVR
So how do the rates compare to the same time last year?
Over the past twelve months Australia has had two cuts in official cash rate (May and August 2016) bringing the official cash rate to a low of 1.50%. When it comes to the average SMSF loan rate though, that 50 basis point cut does not seem to have been passed on in full – or in fact barely at all – based on the products assessed by Canstar.
|Table: Difference in average interest rates between 2015 and 2016|
|Profile||Average 2016||Average 2015||Difference|
|1 Year Fixed||5.42%||5.39%||0.03%|
|2 Year Fixed||5.32%||5.34%||-0.02%|
|3 Year Fixed||5.38%||5.39%||-0.01%|
|5 Year Fixed||5.62%||5.62%||0.00%|
Source: www.canstar.com.au. Interest rates are as at 1/10/2016 and 1/10/2015. Based on loan amount of $350,000 and 70% LVR
So why such a minimal change in average interest rates over the past 12 months? The answer most probably lies with the release of ASIC’s responsible lending statements and the March Advice on self-managed superannuation funds: Disclosure of risks.
How do SMSF loan interest rates compare to non-SMSF loans?
No doubt due in part to the non-recourse nature of SMSF loans, borrowers will pay a premium, on average, against the equivalent cost of a non-SMSF investment loan.
Canstar’s research found the following difference in average loan rates between an SMSF non-recourse loan and an investment loan outside an SMSF, based on a loan amount of $350,000 and an LVR of 70%.
|Table: Difference in average interest rates between Investment Loans and SMSF Loans|
|Profile||SMSF Loan||Investment Loan||Difference|
|1 Year Fixed||5.42%||4.39%||1.03%|
|2 Year Fixed||5.32%||4.21%||1.11%|
|3 Year Fixed||5.38%||4.23%||1.15%|
|5 Year Fixed||5.62%||4.65%||0.97%|
Source: www.canstar.com.au. Interest rates are as at 1/10/2016. Based on loan amount of $350,000 and 70% LVR