The cash rate rise announced by the RBA signals that the market is facing an interesting year ahead. For those with self-managed super funds (SMSF), it is critical to act decisively to protect your fund against the negative impact of the current and further interest rate rises.
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% by the end of the year and will reach 2% by mid-next year. This is the first rise in 11 years and many people with SMSFs have never experienced a rise. In fact only 55% of SMSFs have been in existence for over 10 years.
How can you best prepare for rate increases?
These people may have some experience in dealing with rate rises however recent SMSF trustees won’t. Here are 5 things SMSFs to do in preparation for interest rate increases;
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. 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.
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. 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.
Find a good SMSF loan broker
Providing loans to the SMSF sector is more specialised and requires more understanding of legislation and other requirements. Find yourself a good self-managed super funds (SMSF) loan broker 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.
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. Look at ways to increase cashflow through increased rents, reducing expenses, or even adding more equity to the self-managed super funds (SMSF) by selling assets, adding another member to the fund or considering salary sacrificing.
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 assets that offer better returns.
If the self-managed super funds 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, sometimes triggers like an interest rate rise gives us the catalyst to take action. I would 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.
Yannick Ieko is the founder and managing director of NDIS Loan Experts and SMSF Loan Experts, highly respected brands that have been diligently providing the market with loans and guidance for lending for over 12 years.