Unreviewed LRBA can drag on whole fund


SMSFs looking to service an LRBA with high interest rates may find the fund’s total income being used to service a loan that is expensive compared to other offerings.

SMSF advisers and accountants should be examining the current interest rate settings of limited recourse borrowing arrangements (LRBA) as higher rates may result in negative gearing within a fund, effectively wiping out the value of contributions or investment income, according to an SMSF lender.

Bluestone head of specialised distribution Richard Chesworth said LRBAs can be overlooked during the year as they are not accessible in the same way as property loans outside an SMSF and trustees may have not reviewed the current rate that applies to their arrangements.

Chesworth said Bluestone was seeing SMSFs with residential loans charging interest above 10 per cent and were seeking to have them refinanced as they complete their annual returns and see the LRBA has become negatively geared.

“We recently refinanced a loan that was 9.92 per cent down to 6.89 per cent and the savings on that was around $7900 a year, which is equivalent to the 11 per cent superannuation guarantee contributions on a $72,500 pay rise,” he told selfmanagedsuper.

“For SMSF accountants, advisers and mortgage brokers, reducing your customers’ SMSF loan interest expense by 30 per cent will have a compounding effect of boosting retirement savings by thousands of dollars each year.”

He said many LRBAs have been in place for a number of years and were positively geared, but the increase in inflation and subsequent rate rises have changed that position and the loan interest is now absorbing any rental returns as well as contributions and retirement savings.

While Bluestone deals specifically with residential property loans, the same shift was impacting SMSFs with commercial loans and they should also consider refinancing, he said.

“If an SMSF is negatively geared, regardless of the property type, you’re actually spending a dollar to save 15 cents,” he said.

“Speaking with other lenders, we are seeing refinancing taking place across the board to more attractive rates as the cost saving at present is a key driver.”

He added discussing refinancing was timely for SMSF accountants and advisers following the end of the financial year and as they will be reliant on mortgage brokers to provide the required credit advice.

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