As refinancing booms in the residential market, self-managed super fund customers are experiencing their own interest rate hikes as major banks continue to exit the niche asset class.
However, with banks offering rates of over 9.5%, the time might be ripe for brokers to provide value by looking at what other second-tier and non-bank lenders have to offer.
“As finance brokers, our goal is always to place clients in a stronger financial product, that benefits a stronger financial future,” said Nick Reilly (pictured above), director of Melbourne-based brokerage Inovayt Wealth.
“There seems to be a resurgence of people looking to buy the right investment properties in their fund. Brokers who can position themselves as experts have an opportunity to write great business and diversify their revenue streams.”
The SMSF sector has grown in leaps and bounds in recent years, with over 600,000 funds being self-managed – up from 574,000 in 2020.
The total estimated assets of SMSFs are $889.5 billion, with a sizeable portion invested in residential (7%) and commercial (9%) property, according to the ATO’s March data.
The current trend is particularly strong in the SMSF commercial space, with one non-bank lender saying around 80% of SMSF transactions are “commercial in nature”.
However, the major banks have pulled out of the sector in recent years leaving a vacuum in the space to fill.
Reilly explained that since limited recourse loans don't allow banks to recover their funds from other assets in case property prices decline, discontinuing SMSF offerings is viewed as a risk-reduction measure by banks.
“By holding properties inside your SMSF you can have a large portion of your retirement savings exposed to the property market,” Reilly said. “I don’t believe the major banks want to be exposed to the scrutiny that can come with SMSF lending, right or wrong.”
Reilly said there was $17 billion worth of SMSF finance that the major banks didn’t have appetite for and “it’s costing clients millions”.
“The good news is there are four or five lenders doing SMSF finance in both residential and commercial and they are providing considerable discounts on interest rates,” he said.
“They are doing the opposite, whilst we see major banks increasing rates, trying to push clients out, the smaller lenders are both discounting to retain and offering competitive rates to attract new lending.”
In terms of the amount SMSF customers could save through the brokers, Reilly said savings could be found on all types of SMSF lending as long as the client qualified, commercial and residential.
For example, if a major bank had an interest rate 9.5% on a $750,000 loan, this would equate to $71,250 of interest per annum.
However, when a broker switches the loan to a lender’s rate of up to 60% LVR at 6.89% on the $750,000 loan, they would only pay $51,675 interest per annum – a saving of $19,575 over the year.
“Obviously the larger the debt, the bigger the savings to be had,” Reilly said. “When you start to extend those savings out year on year over 10 to 15 years, it becomes a significant amount of money.”
Of course, there are challenges to overcome. But Reilly said in many cases, the benefits outweighed the costs.
“There are costs to switch, clients simply need to ensure the interest savings outweigh the costs to switch. Some smaller lenders also offer offset accounts which can provide a great benefit for clients depending on their situation, goal and objectives,” Reilly said.
“Every client situation will be different, factors to consider when deciding whether a switch is the best move include loan amount, term remaining on the debt, which ultimately results in the end interesting savings.”
Since SMSF loans are generally a set-and-forget in nature and have a long life, it’s easy to see how clients would end up on higher rates and not question it.
This presents a win-win for brokers: not only can they add value by recommending lower interest rates, but they can access an asset class that has consistent recurring revenue.
Not only that, brokers who diversify into SMSF finance form relationships with accountants and financial advisers who can be a source of future qualified leads.
“Accountants who play in this space will have a lot of clients paying high interest rates, brokers can be a great value add to existing and new clients of these accounting groups,” Reilly said.
What do you think of SMSF loans? Comment below.
