Self-managed super fund (SMSFs) are a popular way for Australians to save for retirement. Unlike a retail or industry fund, a SMSF is one you manage yourself (usually in conjunction with a qualified accountant or financial adviser). However, like all superannuation funds, there are a lot of rules and regulations which govern how it can be invested to ensure it meets its purpose of saving for retirement.
It is possible to borrow money in your self-managed super fund (SMSF) to buy property in Australia. But it must be done under strict conditions, often referred to as a limited recourse borrowing arrangement (LRBA). An LRBA involves a SMSF taking out a loan to purchase a single asset, in this case, a property, which is held in a separate trust. In the event of default on the loan, the lender can only recover its losses from the property security and cannot generally pursue the other assets of the fund. This is the reason SMSF lending rates are slightly higher than standard home loans.
Some of the benefits of SMSF lending include:
- Greater control and flexibility over your super investments
- Ability to access properties that would otherwise be unaffordable
- Potential capital growth and rental income from the property
- Potential tax advantages such as lower tax on rental income and capital gains
Choosing a suitable lender and property for your SMSF is an important decision that requires careful research and planning. Here are some tips to help you:
- Compare different lenders and their terms and conditions, such as interest rates, fees, loan-to-value ratio (LVR), loan duration, repayment options, and security requirements.
- Choose a property that meets the ATO’s criteria for SMSF lending, such as being a single acquirable asset, not being subject to any charge other than the LRBA, and being held in a separate trust.
- Choose a property that suits your SMSF’s investment strategy, such as being in a high-demand area, having strong rental yield and capital growth potential, and being low-maintenance and easy to manage.
- Seek independent inspection of the property before purchasing it, to ensure that you are paying a fair price and that there are no hidden defects or issues.
What are some of the things lenders look for when assessing an SMSF loan application?
- SMSF compliance with ATO and ASIC requirements and the SMSF investment strategy
- Deposit amount – Because they have limited recourse other than the property security, a minimum of 20% deposit is usually required
- Amount of rental income and superannuation contributions need to be sufficient to service the loan.
- Security – acceptable property security with a market value confirmed by a valuer
It’s important to note that borrowing adds complexity to your SMSF and you need to comply with the rules and regulations set by the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC). It’s important to get advice from a licensed financial adviser.
For more information on SMSF lending, talk to one of our mortgage mentors today.
