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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.
A successful SMSF can be highly rewarding, but it can also come with greater risk than a regulated super fund.
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.
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.
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.
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.
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.
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.
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.
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