How much should SMSF interest on Residential property be? 5.69%

Discussion in 'Loans & Mortgage Brokers' started by Illusivedreams, 6th Dec, 2017.

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  1. Illusivedreams

    Illusivedreams Well-Known Member

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    How much should SMSF interest on Residential property be?

    As the title says.

    We are currently paying 5.69% SMSF for a residential house in Sydney.

    It seems alot compared to all our other loans. So i would like see if we can improve on that.
     
  2. Redwood

    Redwood Well-Known Member

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    It should be in the 4's like a normal investment trust loan. It is an absolute joke that interest rates have increased by over 100 basis points in the last 12 months. For instance St George is now around 6.5%, Macquarie 6.23% La Trobe 6.69% et al. Worst of all not all lenders offer SMSF loans so options are limited particularly with OTP. Added to this is that the valuers are shaking in the boots and valuing down off the plan apartments which makes the equation even more tough for SMSF investors.

    I think banks have just found SMSFs too hard, what so hard about it? you just get a lawyer (external) to review deeds and prepare mortgage docs, and these days the deeds are very good and generally legal document providers know what each bank wants.

    In summary, its a limited recourse loan - yes, but all the banks have done the leg work to get their docs and processes right. La Trobe has killed the SMSF market with their product


    I'd say 5.69% is a good rate, CBA advertised rate is 5.73% for new loans and we get a 20 basis point discount on this
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Lol - depends what you mean by 'should'. Ideally it should be free!

    Maybe better question is what is the market rates - for lenders that are colluding together to keep rates high.

    I see no reason why rates should be higher than normal. There are extra legal issues but these are covered by the high fees charged.
     
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    how long is a piece of string :)

    whats a car cost ?

    eg for some people an offset is gold, while the rate is way high............ if you are near fully offset the rate doesnt matter...............

    and after the RC, and when the Fed gov changes, there wont be any more SMSF loans .......... just my view.

    ta
    rolf
     
  5. Illusivedreams

    Illusivedreams Well-Known Member

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    Commonwealth bank does not offer an offset account for SMSF.

    About the rate should i look somewhere else or am i waiting my time?

    I dont need any other features for me the rate is the single most important thing.

    With out some stupid fees for paying the loan off early and staff like that.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Refinancing SMSF loans isnt as easy as it could be and the high costs for fees (legals etc) need to outweigh a marginal interest saving from a refinance..... Payout fees, legals etc could also (likely) apply.

    You may struggle to find sub 5% on a refinance and new lending rules may mean a lower LVR could also apply or SMSF may need a higher cash buffer or a lower val used.... If you use a great broker who knows SMSF lending they should guide you. SMSF loans are a great example of a product that great brokers should know....Its a dangerous product to go shopping on a DIY basis.

    One of the issues many underestimate is that the limited recourse nature of the loan counts towards bank capital adequacy quite differently and so the banks costs of funding is around 50pts+ higher than investor loans. APRA counts a SMSF loan as a balance sheet hinderance and counts default risk more than any other form of loan and this forces the lender to hold more cash unproductively to allow for the risks. That raises its cost of funding. Up goes the rate. Even higher for non-major lenders who need to raise the loan proceeds through other channels.
     
  7. JacM

    JacM VIC Buyer's Agent - Melbourne, Geelong, Ballarat Business Member

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    I find it quite ludicrous that considering they manage risk by only offering a 70% LVR, that they then need to slog with higher interest rates than regular resi loans.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    At 80% the impact of the increased cost of funding means its not viable without a xx% rate rise. Costs of funds exponentially rises against LVR. Property location has a risk weight too but thats done by the cost of funds lender to the lender.

    I guess 70% LVR is a sweet spot where risk v's return works AND gives the bank their required return.

    I used to work in a bank Treasury and am long out of date with the maths but at 100% LVR the internal cost of funds could be something silly like 9% as an example.

    Wait until rate increases happen. SMSF loans will rise at a multiple of actual rate rises. eg 1.2 times the rate increase experienced by owner occupiers. Why ? To ensure bank internal returns dont fall. Margin in $ terms is not the same as a % margin.

    Example : Lets assume Bank makes .7% at 5.7%....12.28% ROI or $700/$100K
    Rates rise to 6.7%. ....0.7% at 6.7% = 10.44% ROI. So bank must increase margin to .823% to retain the 12.28% ROI. So bank now makes $823 / $100K. Why more $profit ? Because shareholders expect a 12.28% ROI... Not a stagnant $700 profit.

    So a 1% in rates means bank will raise its margin by 1.175%
    The magnitude increases with every rate rise. A compound effect.

    And this isnt factoring in banks being forced with high costs of funding or market spreads on risk or other issues that may occur with rising rates.

    This is why when rates rise they may rise very rapidly and well beyond what the RBA does. Good reason why they arent keen to start the process. Its why banks broke from its traditional rule of repeating what the RBA cash rate does. That works OK when rates fall...They actually make more $$$. When rates rise they want to protect profit. The media will scream and there is Nil that can be done.
     
  9. Illusivedreams

    Illusivedreams Well-Known Member

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    Valuation $600k current loan $350k.
    So LVR is Low.

    Any more ideas. Any brokers think we can do better?
     
  10. Illusivedreams

    Illusivedreams Well-Known Member

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    The bank is offering to lock in for period below in order to improve rate Interest and Principal.SMSF

    1 Year Fixed Rate Residentially Secured#

    5.49%

    2 Year Fixed Rate Residentially Secured#

    5.49%

    3 Year Fixed Rate Residentially Secured#

    5.49%

    4 Year Fixed Rate Residentially Secured#

    5.69%

    5 Year Fixed Rate Residentially Secured#

    5.79%

    What are your ideas is it worth locking for?XXX years 3 years seems tempting. better rate and stability?
     
  11. christianeatouggh

    christianeatouggh Member

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    Hi
    I own a place in Hobart through my SMSF. Value of house:220K/Loan Amount: 143K. We use STG and they charge 6.53 (P&I); your rates look cheap! However STG do offer us the offset facility (35K in there atm) and refinancing would be a pain!
    Good luck with your search:)
     
  12. Illusivedreams

    Illusivedreams Well-Known Member

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    Thank.you for the feedback
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    our most recent SMSG purchaser got a rate sub 4.5 :)

    Using equity outside of SMSF, and onlend to SMSF

    ta

    rolf
     
  14. Redwood

    Redwood Well-Known Member

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    Hi Rolf, do you mean a related party loan? if yes, they will need to comply with PCG2016/5 (Legal Database)

    They will need to use a rate of 5.75% P & I - non compliance will be fatal.

    As an FYI CBA who was the cheapest of the big banks uped their rate by 30 basis points....
    Cheers Ivan
     
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