SMSF Loans

SMSF Loans? How Does it work

What types of property can you purchase

  • Residential
    • Off the plan
    • House and lan
    • Existing
    • Units and Houses
  • Commercial
    • Business premise
    • Investment

TYPES OF FUNDING

There are 3 three types of funding mechanisms

  • The bank
  • A peer to peer provider
  • A related party loan

We can show you which solution suits you best and provide a financial plan via our advisory partner firm – Freedom Wealth tailored to your personal needs.

The SMSF Lending Criteria is complicated and getting harder to navigate. With over 11 years experience, we can help you navigate this space to acquire a property with the least amount of stress and worry

Lending policies for SMSFs vary between lenders, particularly in the way they assess your ability to repay the loan.

How do lenders assess my borrowing capacity?

These are the 3 key things to consider

  • Income – SMSF Contributions / Rental Property Income / Other income
    – This is the most important part, so you know and the lender knows you can service an SMSF loan
  • Purhcase costs – Deposit funds – 20% / Stamp Duty / Legal, Conveyance and Advice / Broker costs
  • Location and type of property
    – What you buy and where you buy can affect how much you can borrow

The main hurdle encountered by most SMSF applicants is proving that there is sufficient income in the trust to support the loan.

Typically, the banks will look at the current income of the trust based on its previous two years tax returns and will then assess if that income plus the proposed rental income will be sufficient to service the debt.

Some lenders can also use the income of members or beneficiaries of the SMSF to support the application if a personal guarantee is provided.

SMSF Property Do’s and Don’ts

These are examples of SMSF property strategies that are harder to get funding for:

  • You cannot purchase a property to live in, or for your relatives or associates benefit from
    – All property must be on commercial terms and market values
    – At arm’s length – lease agreements and loans in place

You cannot sell a residential property you own or one a relative owns to your SMSF

  • This would be treated as an in-house asset
  • It would be assessed as non arms length income – taxed at 45% + penalties

You cannot renovate a SMSF property with a separate loan

  • Smsf’s are able to use cash or contributions to manage these requirements

You can buy commercial property and sell a commercial property you own to an SMSF funding is more expensive for commercial than resi property

SMSF Lending FAQs

When is an SMSF allowed to borrow money?

The super laws ( SIS Act) restricts how an SMSF may borrow money. An SMSF cannot borrow money directly or leverage the fund. It must use a related entity as per ( section67a and 67b) or a bare trust to borrow at arms length using a LRBA or an SMSF loan, to protect the other assets of the fund and its sole purpose.

When you borrow money to invest in property via an SMSF, the following needs to be addressed:

  • The SMSF is a beneficial owner, by way of payment of the deposit on the property
  • The Bare trustee is the legal owner of the property and enters into a contract to purchase the property
  • The SMSF has the right to transfer the legal title from the Bare trustee after the loan is repaid
  • The lender must only have limited recourse against one the property asset. This means that in the event of a loan default, the lender must not be able to claim any other assets of the fund.
  • Each borrowing arrangement can only be for a “single acquirable asset”. In the case of strata title or subdivisions, each title is considered a separate asset.
Why are banks pulling out of SMSF Lending?

Most lenders are finding the falling property values and new lending restrictions from APRA
Imposed on lenders means that there are strict rules they must abide by
Some lenders such as CBA and Westpac are pulling out of SMSF lending.

How many lenders are there in the market for SMSF’s?

There are mainly, second and third tier lenders and hybrid solutions available in the market at Present.

When should I apply for an SMSF loan?

You will need to get pre-assessed and commence an application promptly to get an SMSF loan

What are the approval timeframes for SMSF Loans?

Typically between 5-8 weeks is normal, as these loans are more complicated to process

What interest rates are available

Rates vary depending on the following

  • Location
  • Unit or House
  • Resi or commercial
  • Personal servicing strength
How are SMSF loans serviced ?

SMSF Loans are services using up to Three (3) forms of income

  1. Rental income from the property
  2. Super contributions of all members of the fund
  3. Other income from interest, dividends

Its worth noting that if members are close to retirement age lenders may not accept super contributions in their assessment and they may restrict the LVR to 60% -50%, further the loan term may be reduced so the loan services.

SMSF Risks

Setting up an SMSF is not for everyone
Here are some things to check, before you set one up

  • What does it cost?: Typically SMSF Administration costs ( Accounting + Auditing) can vary from, $5,500 – $990 per annum, so it is important that you do your research and find the right provider for your needs
  • What are the benefits of Retail / industry Funds : Retail and Industry funds provide some great benefits
    a) They manage the investment options for you
    b) They provide group insurance cover at a discount rate
    c) The take care of all the administration of the fund
  • Time and experience? You will need to allocate around 1-2 hours a month to oversee your SMSF administration tasks and investments. It helps if you have investment experience, so you make good decisions to grow your wealth in super. Subscribe to magazines, courses and hire an adviser to assist you fund. These are potentially some solutions to employ
  • Failed investments: If an investment fails, such as a unit trust or private investment, there are no compensation mechanisms for SMSF’s unlike for retail and industry funds.

Rules relating to Self-Managed Super Funds

There are special rules governing how super funds must be run:

  • The fund must always be run with the sole purpose of providing retirement benefits.
  • SMSF monies can only be used to generate income and capital growth for retirement purposes
    Withdrawals are only allowed in pension ( 60-65+) phase or when paying for services.
  • SMSFs can only borrow indirectly via a related bare trust.
  • SMSF’s can use individual trustees or use a company as a trustee. Lenders prefer corporate ( company) trustees and often lend a little more to corporate trustee SMSF’s
  • An SMSF can have between one to six* members.
  • The SMSF’s deed must allow borrowing and property investment
  • The SMSF must be a complying fund with the ATO

*from 1 July 2019 SMSF’s are allowed to have up to 6 members in a fund

SMSF Double stamp duty Risk

SMSF Property deals run the risk of triggering double duty. As the Bare Trustee owns the property, whilst the loan is in place, the super fund is only a beneficial owner. Once the loan is paid off, the property must transfer to the SMSF and the title of the property must be changed to the SMSF trustee.

If these arrangements are not attended to correctly, double duty may be imposed on the fund and its members when these steps are undertaken.

Stamp duty will be payable on the initial transfer from the property vendor and when the property transfers from the Bare Trustee company to the SMSF trustee company. Some lenders use their own custodian structure, so the transfer of title upon completion of the loan may also attract additional stamp duty charges! Unbeknown to the SMSF members. This highlights the importance of getting the right advice with these arrangements, before selecting a lender.