Default Loan Setup
When you set up an SMSF property, repayments are typically set up over a 30 year period. This is done so that repayments are considered affordable to the SMSF lender.
Also, pre-purchase projections are made on estimated rents. Once the rents and costs are in place on your SMSF property, it’s time to consider maximising your loan repayments.
Unlike a typical property loan, you don’t rely on your super contributions for living expenses. This means that you do have the option to put as much of your super contributions into paying down the loan faster.
Benefits of Higher Repayments
Paying down your loan faster means you can save significant interest on the life of the loan.
It also means that you are more likely to get to retirement with no mortgage – or even better, you could pay out the mortgage and build more super for a better retirement.
The last reason for setting your repayments higher is that you are less likely to ‘feel the pinch’ of interest rate rises.
Getting Ahead of Interest Rate Changes
Interest rate changes are a very common experience when you own mortgaged property. So how do you get ahead of them and minimise the impact of interest rate changes?
By increasing your mortgage repayments, you are paying down the mortgage faster. If an interest rate increase does come after a year or more of making additional repayments, you’ll have a smaller mortgage, so the interest rate changes will have less impact.
A higher repayment amount may also mean that you could also be paying more than several interest rate rises anyway, so you’ll be ahead of any future changes.
The big idea is that by paying more on the loan repayments, you are paying out the loan faster and saving a lot of money in interest payments.
What Are Your Super Goals?
If you’ve invested in property with super, you are likely to want to get to retirement with the very best outcome… no mortgage, property value increase, and rental value increases are all very appealing for a great retirement.
If those are your goals, then increasing repayments will help you get to retirement with a very small, or no mortgage. That’s the goal that many of our clients are looking towards because it’s where we want to be when we retire. Debt-free with a great property value and income to provide a better lifestyle in retirement.
The Interest Rate Challenge
Mortgage Providers are always battling out for the best offer while balancing their cashflows. This means that the best mortgage provider today is not always the best provider in 6-12 months from now.
The job of any good mortgage broker is to find you a loan that has the best interest rate for your situation. There are a lot of reasons that a lender will approve or decline a loan. It’s not always about the interest rate. Sometimes there may only be one or two lenders who can approve your loan. Getting your loan approved with the best interest rate for your situation is the top priority for any mortgage broker.
Over time, lenders can change their rates up or down. A lender with a good rate today, could be behind other lenders in 12 months, then better again somewhere in the future.
Attempting to change lenders to get better interest rates has it’s own challenges.
Will you qualify with a new lender?
What are the break fees of your existing lender?
Will your new lender have a higher interest rate in 6-12 months?
Would you have been better off staying with your first lender if things change again in the future?
Chasing interest rates can be costly. That’s not to say interest rates aren’t important, but changing lenders to save interest can be stressful, expensive and unsuccessful. You will save far more interest over the life of the loan by increasing your repayments early in the loan period, than reviewing it to pay more as rental increases and contribution increases occur.
Repayment Comparison Chart
For those of you who love to see the numbers this example chart shows just how much interest can be saved with additional repayments, how much earlier a loan can be paid out, and how little an interest rate increase might impact you when you have set higher repayments.
Conclusion
Getting in early to maximise repayments, then reviewing them after rental increases will help you pay out the SMSF mortgage much faster.
Not making additional repayments when you are able to, means you are paying more interest over the life of the loan, taking longer to pay out the mortgage and feeling the pinch of interest rate changes when they occur.
Working together with your professional team can help you not just own an investment property, but get the very best from your investment.
Disclaimer: This article has been provided to highlight the principles of saving more when additional repayments are made.
This information should not be relied on for financial advice.
Always consult a qualified mortgage broker to obtain actual repayment details for your circumstance and mortgage.
