According to Yannick Ieko, the founder and managing director of NDIS Loan Experts and SMSF Loan Experts, the cash rate rise announced earlier this month by the RBA signals that the market is facing an interesting year ahead.
“For those with self-managed super funds (SMSF), it is now absolutely critical to act quickly and decisively to protect your fund against the negative impact of the current and further interest rate rises,” Ieko said.
“The RBA made it clear when it announced the rise that more rate increases are on the way. It is expected that the cash rate will rise to 1.5 percent by the end of the year and will reach 2 percent by mid-next year.
“This is the first-rate rise in over 11 years and many people with SMSFs have never experienced a rate rise. In fact only 55 percent of current SMSFs have been in existence for over 10 years. These people may have some experience in dealing with rate rises however more recent SMSF trustees probably won’t.”
Yannick Ieko is the founder and managing director of SMSF Loan Experts and NDIS Loan Experts, both highly respected finance providers that have been diligently providing the market with loans and guidance for lending for self-managed super funds for over 13 years.
Ieko has outlined five things SMSFs should do in preparation for interest rate increases.
1. Review your interest rate
“Incredibly, many people don’t even know what their interest rate is. We have been living with such low rates for so long that a large number of people have become quite complacent and have lost touch with their actual rate,” Ieko said.
“Undertake a review of your interest rate for your SMSF loan. Review the fees and charges. Get a good sense of what your situation is and then act.”
2. Negotiate the rate increase
“While the RBA sets the cash rate for the country, the reality is that lenders often deviate from the rate depending on the types of products they would like to offer the market and the circumstances and credit risk profile of their customers,” Ieko said.
“If your SMSF loan provider has raised the rate more than other finance providers, negotiate with them to see if they will match competitors.
“If they won’t match or better competitors, start shopping around.”
3. Find a good SMSF loan broker
“Providing loans to the SMSF sector is more specialised and requires more understanding of legislation and other requirements,” Ieko said.
“Find yourself a good SMSF loan broker who is able to work for you and achieve the best outcome. A good operator will have an understanding of what products are available and what type of rate can be negotiated.”
4. Assess your income and expenses
“An increase in interest rates means that the SMSF will have to find more money each month to pay for the increased repayments,” Ieko said.
“Look at ways to increase cashflow through increased rents, reducing expenses, or even adding more equity to the SMSF by selling assets, adding another member to the fund or considering salary sacrificing.”
5. Assess the asset allocation
“Sometimes interest rate rises offer an opportunity to review the asset allocation of an SMSF. Is it time to consider disposing of an asset and investing in other assets that may offer better returns,” Ieko said.
“If the SMSF includes commercial property, is it time to consider moving into NDIS-approved properties that offer higher returns? NDIS properties enjoy rent that is CPI indexed – who wouldn’t want this type of benefit built-in during a time of rising inflation.
“While these things should be considered on a regular basis, sometimes triggers such as an interest rate rise gives us the catalyst to take action. In any event, I’d recommend to trustees to speak to their advisers.”
Ieko states that the most important consideration is to make changes on your own terms, not after the SMSF has started to experience cash flow stress. This ensures you are doing things in a careful and considered way and avoiding rash or unwise decisions.
