Rate impact not yet seen in LRBA market

LRBA interest rates

SMSFs with related-party LRBAs have yet to respond to the rise in the safe-harbour interest rate as their peers search for better terms following successive moves by the Reserve Bank of Australia.

The increase in the safe-harbour interest rate for related-party limited recourse borrowing arrangements (LRBA) has yet to drive SMSFs to commercial lenders, but it is likely they will follow funds that have changed loan arrangements due to successive rate rises, according to a non-bank lender.

Thinktank partnerships and distribution general manager Peter Vala said SMSF trustees with related- party LRBAs impacted by the increase in the safe-harbour rate to 8.85 per cent had yet to start the refinancing process, but are likely to do so once the new rate starts to have an effect.

The change in the regulated interest rate is only very recent and as such we are yet to see the effect of this, although we are expecting it will precipitate a further jump in refinance activity as most lenders are currently offering interest rates comfortably under this level,” Vala told selfmanagedsuper.

“When any regulatory change of this nature arises it forms a catalyst for trustees and their advisers to conduct an overall review of the fund. It is a worthwhile initiative for existing SMSF LRBA borrowers to assess whether a refinance of a related-party loan is now advantageous to produce a better long-term outcome.”

He said a majority of SMSF loans via Thinktank were established for long terms, which has reduced the impact of increased loan repayments due to rising interest rates, and in turn decreased the number of refinances or asset sales by SMSF clients, but shorter-term loans have not fared as well.

“Some institutions that have funded SMSF LRBAs in the past using shorter loan terms or applied the principles of a weighted average unexpired lease term and weighted average lease expiry, which can limit the loan term, are experiencing elevated discharge rates as borrowers seek better terms,” he said.

“With this being quite common, we have been seeing a number of SMSF trustees seeking to refinance to avail themselves of loan terms up to 30 years and frequently a lower interest rate.”

He added that despite a series of interest rates rises there was still a steady flow of residential and commercial SMSF loan applications for refinancing and purchase activities.

“Demand has softened slightly, but not as much as other lending classes spanning the wider range of traditional standard commercial or residential loans,” he said.

“It would definitely seem the benefits of financing property within an SMSF structure continue to attract new customers seeking to plan ahead for their future retirement.

With the demand for SMSF lending still on the increase, we have been seeing a greater relative increase in residential SMSF transactions of late, however, approximately two-thirds of our SMSF LRBA lending is still accounted for by commercial property loans being advanced to self-employed and SME (small and medium-sized enterprise) business owners.”

This subject will be discussed further at the SMSF Trustee Empowerment Day hosted by smstrusteenews. The event will provide invaluable information for the clients of SMSF practitioners. To register please visit the SMSF Trustee Empowerment Day webpage here.

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