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SMSF gearing on rise during COVID

SMSF gearing

The COVID-19 pandemic has seen more SMSFs use borrowings to acquire assets.

A sector service provider has revealed SMSF trustees are increasing their usage of gearing as a result of the effect COVID-19 has had on lending rates.

According to SMSF Loan Experts founder and managing director Yannick Ieko, trustees are actively taking out loans to acquire property and other assets for their super funds and also consciously seeking out lenders providing the most competitive interest rates.

“Typically, SMSFs have paid higher interest rates for loans when purchasing property and other assets. Until recently, the high cost to switch to other loan providers offering better rates has also hindered SMSFs from making the switch. Now this has all changed,” Ieko noted.

“Currently, the interest rate starts at 3.59 per cent per annum for residential up to 60 per cent LVR (loan-to-value ratio). The rate recorded on 11 September 2020 was 4.89 per cent per annum with the same lender, which has been the market leader for over 18 months, so the current rate is a good benchmark.”

On top of an increase in the popularity of SMSF borrowing, he has also observed an increase in fund establishments – a trend he attributes to an improvement in financial engagement during the current COVID-19 lockdowns.

“Now that more people are at home spending time online researching the market, interest in self-managed super funds has spiked,” he said.

“People are starting to realise that they can have more direct control over their super by managing it through their own SMSF.”

With regard to establishments, he confirmed more people under the age of 40 are setting up their SMSFs with the demand for more control over their retirement savings as the main motivating factor.

“There is no doubt that having your own SMSF gives you a range of options that institutional-based superannuation organisations can’t give you. With millennials wanting more control over their life, having an SMSF is the ideal solution for retirement planning,” he said.

The recently released “Vanguard/Investment Trends 2021 SMSF Investor Report” also reflected an increase in SMSF establishments during the COVID-19 pandemic.

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