Australians love investing in real estate – and a self-managed super fund (SMSF) loan can make the benefits of investment property ownership a reality for many borrowers. Whether a commercial or residential property, an SMSF loan can play an important role in your retirement plans.
What is a self-managed super fund?
An SMSF is a private super fund that you manage yourself. SMSFs provide greater flexibility and allow investors to hold a range of assets including shares, term deposits, bonds, investment properties, cash and unlisted assets.
A successful SMSF can be highly rewarding, but it can also come with greater risk than a regulated super fund. Managing an SMSF also requires some work and it’s important to seek guidance from a trusted financial adviser.
SMSFs can have up to four members and require their own separate Tax File Number (TFN), Australian Business Number (ABN) and transactional bank account. Because SMSFs are a type of trust, you must designate a trustee to have authority over the investment strategy, administrative tasks and financial statements.
What is a self-managed super fund loan?
SMSF loans or Limited Recourse Borrowing Arrangements (LRBAs) support SMSF trustees to borrow money to buy an investment property they may not be able to afford to buy through their SMSF outright.
After the purchase, ownership of the property is held in a custodian trust until the loan is repaid. At that point, the SMSF acquires the title. Throughout the life of the loan, SMSF members have a beneficial interest in the property. Any income generated is reinvested into the SMSF to help repay the loan or increase the value of the fund.
While SMSF loans can be used to buy either commercial property or residential property, it must pass the tax office’s sole purpose test. This means the trustee must be able to prove that the sole purpose of buying the property is to provide retirement income.
What is a self-managed super fund loan application?
An SMSF loan application is the document you will need to complete to get your loan approved. As part of the process, each lender may require different documentation, but most will want copies of the SMSF trust deed, the custodian trust deed and the contract of sale.
You will also need to show proof of adequate personal income and you may need to compile SMSF bank statements, tax returns, audit certifications and rental estimates. This information helps the lender to ensure that everything is in order and that you can afford to make the necessary loan repayments.
How much can I get from an SMSF loan?
The amount you can borrow in an SMSF loan will depend on your financial situation as well as your lender and their policies. Some specialty lenders offer SMSF loans from $100,000 ranging up to $4,000,000.
You might need to maintain a minimum amount within your SMSF after the property sale. This amount will vary depending on your individual circumstances.
Some SMSF lenders may also require you to keep a certain percentage of liquid cash. Depending on your lender, there is a possibility that they will agree to waive this if the initial deposit is large enough or if the rental income covers the loan repayments.
What are the SMSF loan requirements?
Most SMSF loans have four main requirements:
- The property must be for the sole purpose of providing retirement benefits or death benefits to SMSF beneficiaries
- If residential, the property must not be acquired from a member of the SMSF or any related party of a member
- If residential, the property must not be lived in or rented by a member of the SMSF or any related party of a member
- The property must not be a single acquirable asset
If you are purchasing a commercial property, it may be bought from or leased by SMSF members. This must be done at fair market value and the property must only be used for business purposes.
Are there any SMSF loan risks or downsides?
Under limited recourse property loans, a lender cannot recoup losses from any other assets held in the SMSF. They can only make a claim against the property, which is held in a custodian trust.
While this provides borrowers with some level of protection, it is important to do your research before diving in. A licensed financial adviser can help you to ensure you understand your obligations and assess whether an SMSF loan aligns with your long-term investment strategy.
What is a related party loan?
A related party loan is when members of an SMSF lend money to the SMSF in their own personal or corporate capacity, rather than getting a loan from a bank.
Usually, an SMSF member will get a line of credit in their own name and lend that money to the SMSF to pay the mortgage. Related party loans are often more cost-effective because they can eliminate the need to set up a corporate trustee or a custodian trustee.
It’s important to note that the Australian Tax Office requires that these related party loans are on an arms-length basis and with commercial terms. Essentially, this means the member must charge interest and set clear terms and a repayment schedule in the same way that a lender would.
What does LVR mean?
Loan-to-value ratio (LVR) refers to how much you are borrowing compared to the value of the property. A larger deposit means you will have a lower LVR and a lower LVR means less risk to the lender.
Depending on your lender, the maximum loan to value ratio for SMSF loans may vary.
Some lenders offer up to 80% LVR loans for certain types of properties which means they will lend up to 80% of the investment property’s value with the remaining amount paid through your SMSF.
Can I refinance with an SMSF loan?
While it’s possible to refinance an existing SMSF loan, few lenders provide SMSF loans for this purpose. As a specialist lender, Liberty has the freedom and capacity to make loans that traditional banks cannot accommodate – including SMSF loan refinances.
Many borrowers have taken out SMSF loans when interest rates were higher, or their financial situation was different. In these cases, it is worth looking into refinancing your SMSF loan to see if there are better options for your individual needs.
Do I need an SMSF loan broker?
If you have an SMSF and are considering taking out a mortgage to buy an investment property, your first step should be to seek advice from your financial adviser or accountant.
If you decide to go ahead, a mortgage broker can help you find the right SMSF loan for your needs and help explore what other lending options may be available to you. And, if you’re new to SMSF lending, a broker can help to simplify the process and answer any questions that may pop up along the way.