Self-Managed Super Fund (SMSF) Loans
An SMSF loan can help you buy residential or commercial investment property as part of your superannuation investment portfolio.
An SMSF loan allows you to leverage the money in your super fund to invest in property. SMSFs are tightly regulated and controlled by the Australian Taxation Office and lending policy is far stricter than standard housing loans. Not all mortgage brokers write SMSF loans, but at Aspire Mortgage & Finance we have specialised in this field for the past 10 years.
What is a Self-Managed Super Fund?
An SMSF is a private superannuation fund that you manage yourself, giving you greater control over your superannuation investment decisions. It can provide greater flexibility and allow members to hold a diverse portfolio of assets such as shares, bonds, property, cash and term deposits. An SMSF comes with greater responsibility and risk than a regular super fund and guidance must be sought from a trusted financial advisor.
What is an SMSF loan?
An SMSF loan is a Limited Recourse Borrowing Arrangement (LRBA) that allows SMSF trustees to borrow money to buy an investment property. Once purchased, the property is held in a custody trust until the SMSF pays out the loan and takes over the title of the property.
Under an LRBA, the lender cannot recoup losses from any other assets held in the SMSF, only the property which is held in the custody trust. Whilst this offers some protection for borrowers, it is imperative that you consult a licensed financial adviser to understand all potential risks.
SMSF loans have tighter lending policy and require greater documentation than a standard housing loan. Any proposed purchase in your SMSF requires the appropriate advice and planning before going to contract on a property.
Not all banks offer SMSF loans and we advise SMSF borrowers to look at more than just the interest rate, as establishment fees and legal fees vary greatly between banks and lenders.
Current loans available for SMSFs include:
- – Interest only up to 5 years
- – P&I terms up to 30 years
What do lenders look for when assessing an SMSF loan application?
Lending policy for SMSFs is much tighter than standard housing loans. Lenders look at the following factors to determine if and how much they are willing to lend to a super fund:-
SMSF compliance – that the SMSF is compliant with ATO and ASIC requirements.
SMSF Investment Strategy – that the Trust Deed permits property investment and borrowing as part of their investment strategy.
Deposit – A minimum of 20% deposit for residential SMSF loans and 25% for commercial SMSF loans. This amount varies between lenders, with some requiring a larger deposit.
Balance of fund after purchase – Some lenders require a specific balance available in the fund pre or post settlement.
Superannuation contributions – The amount, frequency and consistency of member superannuation contributions and that members have stable employment to keep up these contributions. They will also look at the age of members as this may affect their ability to repay the loan in the future.
Rental income – Actual or anticipated rental income is factored into the borrowing capacity assessment.
Security Property – That the market value and location of the property are acceptable.
SMSF Property Rules
There are a number of regulations regarding the property being purchased by an SMSF:-
Residential purchases
- – That the sole purpose is to provide retirement benefits to the SMSF members.
- – The property cannot be purchased from a related party of an SMSF member.
- – The property cannot be lived in by an SMSF member or related party.
- – The property cannot be rented by an SMSF member or related party.
Commercial purchases
Commercial premises purchased in an SMSF can be leased to an SMSF member for their business use, but it must be done at market rate and only used for business purposes.
Important Disclaimer
It is important that you seek the advice of a trusted professional who holds an Australian Financial Services Licence to set up an SMSF. Mortgage brokers, bank lenders and property consultants are not licensed to advise on the establishment of an SMSF. Should you require assistance with this we can refer the services of financial planners that specialise in this area and are independent of us.
It is recommended that you exercise caution with seminars where an advisor, property consultant and mortgage broker/banker are promoting/selling new properties as a collective group. We always recommend obtaining an independent valuation, particularly when coming from a seminar selling new property.
For reputable information on establishing and maintaining an SMSF and potential benefits, risks and pitfalls, we recommend visiting the following sites:
Moneysmart – SMSFs and Property
ATO – Self-managed super funds
ASIC – Superannuation