Promoted by loans.com.au
Borrowing through your self-managed superannuation fund (SMSF) to acquire a property has long been a recognised investment strategy. If your fund holds a property and you're repaying a loan under a limited recourse borrowing arrangement (LRBA), you may reach a point where refinancing that loan makes sense.
This article walks through how refinancing can deliver savings, and how this plays out when the loan is inside an SMSF. Note that it's general information only, and we highly recommend you consult with your financial advisor for tailored guidance.
What is refinancing (and how can it save you money?)
Refinancing simply means replacing your existing home or investment loan with a new one, either with your current lender (internal refinance) or a different lender (external refinance). Typically, this usually involves a new application, assessment, valuation, and settlement, just like when you first borrowed.
Refinancing to a lower interest rate can reduce your repayments and total interest paid over the life of the loan, provided that the savings outweigh the costs of switching. So before you refinance, consider discharge fees, application fees, and government charges, and whether your out-of-pocket costs are higher or lower than the savings when you refinance.
Use tools such as a mortgage switching calculator to run the numbers.
Refinancing is more than just 'chasing' lower rates
In addition to securing lower rates, refinancing can also be done if you want to:
-
Shift from interest-only to principal-and-interest repayments to reduce debt over time (where consistent with the fund's strategy)
-
Access features like an offset account or redraw facility to better manage cash flow
Because super is a long-term investment, even a modest rate reduction, maintained over many years, can affect the eventual retirement balance. However, any change must still comply with ATO rules and the fund's trust deed and investment strategy.
How does refinancing work on SMSF loans?
An SMSF can borrow to acquire a property using a limited recourse borrowing arrangement (LRBA).
Under an LRBA, the asset is held in a separate holding trust, and the lender's recourse is limited to that asset if the fund defaults.
Take note: In addition to acquiring property, the ATO confirms an LRBA can also be used to refinance an existing borrowing used to acquire that property, provided the arrangement meets superannuation law requirements.
Refinancing an SMSF loan usually involves providing trust deeds, the LRBA/holding trust deed, financial statements, and audit reports. Trustees must also ensure the refinance aligns with the fund's investment strategy and sole purpose test.
This process is typically document-heavy and may take longer than a standard refinance.
Why might an SMSF refinance decision be beneficial?
Obtain a lower interest rate
SMSF loan rates can be materially higher than standard home loans due to complexity and risk. A refinance may secure a competitive rate for your fund.
Improved cash flow
Reducing repayments or shifting to a structure better aligned with your fund's income stream (e.g., rental from property) can improve liquidity within the SMSF.
Better loan features
You might move into a loan product with more suitable features (e.g., flexible repayment term, ability to make extra repayments, or optimised term length) that fit your fund's objectives.
Align with strategy
Because SMSFs operate under strict rules (such as the sole-purpose test), trustees may wish to restructure the borrowing to better reflect the long-term investment strategy of the fund.
Key regulatory and structural differences with SMSF refinancing
Refinancing an SMSF loan isn't as straightforward as swapping out a standard home loan.
Because the borrowing sits within a regulated superannuation structure, trustees must navigate additional rules designed to ensure the fund remains compliant with the Superannuation Industry (Supervision) Act.
No increase in borrowing amount
Under superannuation law, the refinanced loan generally cannot exceed the outstanding balance of the existing LRBA loan.
This means trustees cannot draw down extra funds or "cash out" equity in the property during the refinance. The only exception to borrowing more is if minor repairs or maintenance are required to bring the SMSF's property up to rental standard. You will need to provide evidence to the lender.
Read Also: Renovating a property with an SMSF loan
The LRBA structure must remain intact
This means the property continues to sit in a separate holding (or bare) trust, and the SMSF retains beneficial ownership of the asset.
The lender's recourse must remain limited solely to that asset. If the structure is altered or the refinance breaks the LRBA rules, the transaction may breach compliance, potentially triggering tax penalties for the fund.
You must meet the eligibility criteria
You can generally borrow up to 80% of the property's value for an SMSF loan. However, when refinancing, the entire cost of the refinance must sit within the allowable LVR.
Some SMSF loans often come with LVR caps around 70-80%, and in some cases even lower, meaning a 20-30% buffer after settlement. This means the property's value has increased since the SMSF purchased it.
Additionally, lenders may require that the existing SMSF loan has been active for at least 6-12 months with a clean repayment record before they will consider a refinance. This demonstrates that the LRBA is stable and serviceable.
Reviewing the potential savings
When contemplating a refinance, trustees should analyse the current interest rate and remaining term of the loan, fees associated with the refinance, break costs if the current loan is fixed and being terminated early, and whether the new loan's rate/terms actually provide net benefit after all costs
For example, if an SMSF held a $400,000 loan at 9.5% p.a. and refinanced to 6.9% p.a., the monthly saving could be about $520 (excluding fees), amounting to over $30,000 over five years.
These savings, if redirected into the fund, can enhance the long-term retirement outcome for members. However, it is critical that the refinance aligns with the fund's strategy and that the cost-benefit calculation is robust.
How to prepare if you're considering refinancing an SMSF loan
-
Review your current loan and strategy - Check interest rate, term remaining, fees, repayment history and whether the loan still supports the fund's investment objectives.
-
Gather documentation - Ensure you have up-to-date trust deeds, custodian trust deed, audited statements, tax returns, investment strategy, and proof of property value.
-
Run cost-benefit modelling - Include interest rate scenarios, costs of refinancing, break costs if applicable, and how the savings feed into the fund.
-
Ensure compliance alignment - Confirm that the proposed refinance meets LRBA requirements, does not exceed the original loan balance, and aligns with the SMSF's investment strategy.
-
Apply and monitor - Submit the refinance application, monitor settlement progress, and after settlement, ensure the loan is set up appropriately (loan structure, repayments, fees).
What to watch out for when you refinance your SMSF loan
Refinancing an SMSF borrowing carries greater complexity and risk. Some of the key pitfalls include the following:
Compliance risk
If the new arrangement does not meet superannuation law requirements (e.g., LRBA structure breaches, related-party loan rules, or access of funds prohibited), the fund may face adverse tax consequences, such as non-arm's-length income (NALI).
Switching costs
The costs of refinancing may offset the savings, especially if the interest rate reduction is small or the property has lost value (raising the LVR).
Liquidity risk
If the fund becomes cash flow constrained (for example, rental income drops or property sits vacant), the fund may struggle to service the refinanced loan.
Limited lender market
Compared with standard residential lending, the SMSF loan market is more niche. Fewer lenders, stricter criteria and higher rates can apply.
loans.com.au is one of the non-bank lenders in Australia offering SMSF loans via an easy and streamlined application process. Because everything is online, you don't have to worry about taking time out of your day to visit a branch or print out physical copies of your documents. All you need to do is apply online.
Image from Unsplash
