Australian retirees invested in property may be losing tens, if not hundreds of thousands of dollars in retirement funds, but there’s a simple fix.
Yannick Ieko, the founder of SMSF Loan Experts, says all retirees need to review their current SMSF property loan.
He says most self-managed super funds pay around one per cent more interest on their loans, which over a period of 10 or 20 years means they are significantly eroding their nest egg and their chance of a comfortable retirement.
“Apart from the actual loan amount, a significant bulk of your mortgage repayments goes towards paying off the interest your loan has amassed over time” says Mr Ieko.
“While your home loan repayments go towards repaying the bank for the money they lent you, the interest is the cherry on top that banks make their money from.
“Interest, in fact, is often the thing that prolongs the life of your loan and prevents you from paying it off sooner. The important thing for you to understand; however, is that your interest rate is not set in stone.”
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Most SMSFs must commit to one home loan for the entire length of a mortgage, which leads to complacency in reviewing home loans.
This means older Aussies may be missing out on big savings on their fortnightly or monthly loan repayments.
“If you haven’t reviewed your interest rates in the last three to five years, then I can nearly guarantee that you’re paying more in interest than you should be without even looking at your statement.
“Interest rates are currently at a record low and, unfortunately, it is often retirees, or those looking to retire in the coming years, who are not taking advantage of these historic rates.”
Many older Australians need to brush up on their skills and vocabulary to get a better interest rate on their property loan, he says.
“The extra hundreds and thousands of dollars that retirees are paying every year on interest could help them cover increasing healthcare costs, travelling to see the grandkids more often, and just making their retirement more comfortable,” says Mr Ieko.
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Mr Ieko sketched out two scenarios for a loan with a remaining term of 20 years of principal and interest.
At 5.5 per cent – a typical interest rate for an established SMSF – interest payable on a loan of $500,000, would be $325,465.
If an SMSF were to get the best interest rate currently available, say 3.99 per cent, the interest payable on the same loan would be $226,544.
“Assuming that the savings do not return anything over the 20 years, which is near impossible because of the wide variety of investment options in Australian SMSFs, that’s a $98,921 cash disparity in the bank by the time the 20 years is over between the two scenarios,” he says.
“In reality, that money will be invested over that period of time and depending how well this is done, the final number is likely to be much higher.
“Considering the average man retiring between 55 and 64 has $332,700 and woman $245,100, that is a significant difference in the money you could have sitting in your account come retirement.”
Mr Ieko suggests a number of simple steps you can take if you think you’re paying too much interest on your SMSF property loan.
They include deciding which features of your current loan you want to keep, comparing your interest rates on similar loans and seeing a mortgage broker or SMSF loan specialist to help you find the most suitable interest rate for your needs.
Then, he suggests asking your current lender to match the other interest rates or offer you a cheaper alternative.
“Double-check that the benefits of your new loan outweigh any fees that will be associated with closing your current loan and applying for another,” he adds.
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Mr Ieko points out that SMSF fees for limited recourse borrowing (LRBA) arrangements have also dramatically decreased in recent years.
“It is important to understand the costs associated with setting up an LRBA,” he says.
“SMSFs were often required to pay upwards of $3000 to $5000, and most people, especially retirees, with an existing loan may be under the impression that this is still the case.
“However, alongside rates, fees have also fallen dramatically. You can now process a refinance from beginning to end with less than $1000 in fees from the new lender and its providers.”
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