Self Managed Super Fund loans (SMSF loans) for property
Changes to Self Managed Super Fund legislation in Australia mean that you can now borrow in your Self Managed Super Fund (with certain types of loans) to invest in real estate. Different lenders differ in their interest rates, loan to value ratio (LVR) requirements, and other policies for their limited recourse loans that apply to Super funds.
What is a self-managed super fund (SMSF) and how does it work?
A Self Managed Super Fund is a form of retirement fund from which members have better control over their retirement savings, far better control than industry or retail super funds. SMSF includes better control over investments and comprehensive choices of investments. When eligible, each member is entitled to have retirement benefits paid straight from the SMSF. Its sole purpose is to provide benefits to every retired member or if a member dies before retirement, its beneficiary will receive the benefits. One can manage and have their own private super fund but it must be regulated by Australian Taxation Office (ATO). An SMSF can have one to four members in which each member is considered as fund manager or trustee.
Can I invest in Commercial Real Estate in a SMSF?
Yes, you can invest in Commercial Real Estate in a SMSF. However, there are restrictions. The Commercial Property to be purchased must fit the definition of a “single acquirable asset” as defined by the Superannuation Industry Supervision Act 1993 (SISA). Determining if the commercial property that you are buying is considered as a “single acquirable asset” can be confirmed by a solicitor conversant with SMSF compliance. The Commercial property must also meet the acceptable criteria set by the lender.
Having your business premises in your SMSF is an option for some business owners. Your SMSF can purchase your own business establishment. In this way your business makes rent payments directly to your SMSF at the market rate.
Can I invest in Residential Real Estate in a SMSF?
Yes, you can invest in residential real estate in a SMSF. Purchasing a residential property in SMSF is has a few extra restrictions than when purchasing a commercial property.
Your desired property must first comply with these terms:
- Residential property should not be attained from any related party of a member.
- Residential property must not be used by any fund member or any of his related party.
- Residential property must not be rented by any fund member or any of his related party.
- It must pass the “sole purpose test” of providing only retirement benefits to fund members.
Can my SMSF buy a property that I personally own?
SMSF can purchase a commercial property that you already acquired. However, your Self Managed Super Fund will not be able to purchase residential property that you or a related person or entity already own.
There are penalties for getting it wrong. This includes paying a large percentage of your superannuation fund balance as a tax penalty. You need to get advice from a suitably qualified professional. You should discuss any possible tax implications of transferring your property from your name into your SMSF with a professional (accountant) that knows about Self-Managed Superannuation Funds.
What are the restrictions buying a property in your SMSF?
There are some restrictions when it comes to any property bought by an SMSF, namely that you can’t construct a new property, you can conduct major renovations, nor can you live in the property at any stage until you’re in the pension phase.
Note that if the purchase is for your business, the rules are a bit different. While you can’t sell a residential property to your SMSF if you or someone close to you owns it, you can do it with a commercial property.
Renovations and repairs are also a complex area in regards to SMSF properties:
- Renovation and repair of your property are allowed, however, some conditions about the financing of those must be met first.
- Usual utilities and maintenance can be done with no legal issues.
- Big changes or improvements in your property can not be financed by SMSF.
- Funding your home renovations with your own money might cause potential issues.
- Adding money to your fund to spend for renovations can cause challenges due to strict limit on the amount you can contribute to your super each year.
- The ATO can help by you classify whether the activities on your property is considered a major improvement or just part of maintaining it.
This is not considered financial advice. You should always seek advice from a specialist SMSF advisor for further assistance.
What other consideration are there on investing in real estate in a SMSF?
Fees and charges may change depending on the SMSF and property purchased, this could reduce your super balance. It is advisable to find out all fees or costs before signing up for this property investment. People with only a small amount of accumulated funds may not be suitable to move to a SMSF as the fees and charges to set up and run the SMSF will be proportionally higher than using a retail or industry fund.
Can my SMSF borrow money?
Yes, under certain circumstances your SMSF can get a Self Managed Super Fund loan (SMSF loan). The SMSF cannot borrow directly but can borrow in a structure called a Bare Trust also known as a Declaration of Trust. There are governing laws controlling the use of SMSFs borrowing money, and limiting the recourse of the lender in the event that the trust cannot satisfy its repayment responsibilities.
These are the basic criteria a trust must follow in order to borrow money:
- Every arrangement should only be for a single acquirable asset.
- Assets can be legally acquired by SMSF if the funds are available.
- A security trust or a security custodian is required for a trustee to hold such assets.
- SMSF has the right to acquire the legal title from the security trustee after repaying the loan.
- A beneficial interest is acquired by the SMSF from the start.
- The asset is secured by a limited recourse loan. This means that the lender cannot claim any of the other assets in the SMSF in the event of a default.
What is a Limited recourse loan?
A limited recourse loan is a type of loan in which the lender cannot pursue the borrower’s other assets (in their SMSF) if they area not able to give sufficient repayments and there’s a need to seize the property purchased and recover any losses from the borrower. This also limits the lender’s rights only to the asset obtained with the fund and any supporting assets provided. However, the lender can still chase the borrower to cover for the losses. Self Managed Super Fund loans (SMSF loans) need to be limited recourse loans.
How much deposit do I need when purchasing property with an SMSF?
Generally, one will need a deposit of at least 20% of the property value, both for residential and commercial properties, but many lenders will require you to provide 30%. You will also need to cover the transaction costs (like stamp duty etc..) involved in acquiring a property, this is usually about 5% of the property value.
Your existing superannuation fund balance can be used for your deposit. For example, if you were able to have at least $100,000 in a manage superfund then you can use it as a deposit for your SMSF fund to acquire a property.
What Interest rates can I get?
Interest rates will depend on the lenders policy. Different lenders have their own SMSF loans which vary in their interest rates, fees and features. Comparing loan packages from different lenders is a smart choice.
For SMSF property loans, interest rates are usually higher than the normal interest rate in residential home loans. Most banks / lenders process their SMSF loans from their commercial or business banking division. These parts of the banks offer higher costs than the normal home loan department and as a result, they charge more for their loans. SMSF loans require a larger amount of documentation to be prepared and reviewed, this means that the fees and charges can also be a lot more for SMSF loans compared to normal residential property loans.
Which lenders offer SMSF loans?
Not all lenders will lend to self managed super funds. Many lenders see SMSF as additional work processing such transaction, for a higher risk loan with a lower profit. Those lenders that do provide Self Managed Super Fund loans can have very different policies. Some do not lend for the purchase of commercial property but have good rates on residential property SMSF loans. Other lenders lend for commercial property but are more expensive for residential property. We know the different lenders and which ones are best for each situation.
Are Low Doc loans available?
No, Unfortunately, low doc loans are not available for SMSFs.
SMSF loan serviceability – How will the lender assess my SMSF loan?
The most common problem encountered by SMSF loan applications is proving sufficient income.
Normally, lenders will look at the current income of the trust and will base income on the last two years tax returns of the applicant (the SMSF trust). Then, they will assess if the income of the SMSF plus the estimated rental income will be satisfactory to service the debt.
There are some lenders that can also allow to use the income of its members or beneficiaries from SMSF to support their loan application only if there will be personal assurance provided.
Can I refinance an existing SMSF loan?
Refinancing an existing SMSF loan can be done with SMSF. This can give benefits for those who took out a Limited Recourse Borrowing Arrangements (LRBA) during the time when interest rates were higher and was a smaller pool of SMSF lenders. Nowadays, SMSF lending more common and lenders offer different SMSF loan products.
Is refinancing compliant with Superannuation Law?
Yes, if it’s done correctly. Refinancing does not create a new asset and passes the criteria of being a ‘single acquirable asset’. However, it is important to seek professional advice before going on with a refinance to ensure you understand the Finance, Taxation and Superannuation Law Considerations.
How long does my SMSF loan application will be approved?
Applying for an SMSF loan is more complicated than a normal home loan. Because there are a lot more documents involved it will take you time to get them all together to submit to the lender. It will also take time for the review your application and provide a pre-approval. It is best to be prepared over prepared to avoid any delays.
What is the right time to apply for an SMSF loan?
You should apply before you start looking for the property. This will help you process the application systematically and avoid future issues or disappointments.
What other income sources will the lenders consider when assessing my SMSF loan?
Some lenders are more flexible than others, however there are many banks that will not accept income from shares or interest from the current assets of your trust.
If you are planning to sell the assets to arrange for a deposit to acquire the property then that income will not be considered in the lender’s assessment.
Will super contributions of people close to retirement be considered by the lender?
If you are already close to your retirement age, the lender may not consider your super contribution in their assessment. The lender may shorten the loan term for people close to retirement to ensure that payments are able to be met during retirement.
Why should I use a mortgage broker for my SMSF loan?
Standard commercial and residential loans offered by most by the different banks and lenders can vary significantly. This is even more so for Self Managed Super Fund loans (SMSF loans). For SMSF loans there can be even larger differences in fees and interest rates. Some lenders offer good deals on SMSF loans for residential property other lenders have good deals for commercial property.
In addition to this, not all lenders can offer an offset account with your mortgage, which is vitally important if you have lots of cash in your SMSF. A 100% offset account is a regular cheque account, except that it is connected to your home loan account. The lender can only charge you the interest on the balance of your home loan minus the balance of your offset account. The good thing about this is you’ll pay off the loan faster and also save a lot of money in interest.
What advice should I get before I set up my SMSF?
The information provided on this website is not considered as financial advice. You should get professional advice about setting up a SMSF before you start. Anyone who gives advice on an SMSF must have an Australian Financial Services License (ASFL).
This is not considered financial advice. You should always seek advice from a specialist SMSF advisor for further assistance.
Contact a mortgage broker from Oak Laurel to get your Self Managed Super Fund loan application started.