How to get a loan on your SMSF - and make a great property investment!
In a previous blog, we outlined what a Self-Managed Super Fund was - and how you could potentially get a loan for one and buy property. Here, we’re going to unpack the process in more detail - including what’s needed to get a loan approved and any restrictions you might encounter.
Note that this type of lending is a relatively new phenomenon, compared to conventional home and commercial loans. Furthermore, lenders and banks all have different ways of assessing SMSF applications - which is where OzBroker has the experience and expertise to help you find the best outcome.
When you can borrow - and how much you can borrow!
Lending rules, limits, terms and conditions vary between lenders. That’s where OzBroker can work with you through all the various complexities.
We can help apply for:
- Regular SMSF Investment Loans of between 70% - 80% of a property value.
- Commercial property loans of up to 75% of a property’s value for non-specialised securities.
We can also help with:
- SMSF applications with no income evidence (albeit with restrictions involved).
- Bad credit loans - with up to 80% of a residential property or 70% of a commercial property.
- Working with specialist lenders that can help with unusual security or income types.
- Finding discounts - with most lenders adding a margin to normal residential loan rates.
- Standard investment loan rates for select applications which meet specific criteria.
Please note, unfortunately SMSF construction finance is not available.
When weighing up your options, remember to consider the additional costs involved. You’ll have to pay to set up and maintain your SMSF, then account for all the subsequent fees and charges involved in the purchase of the investment property.
How will lenders assess your borrowing capacity?
The most important thing, of course, is to prove the trust has enough income to support the loan - and pay the debt.
Normally the lender will work this out based on the trust’s last two years of tax returns - along with proposed rental income. They may also take into account the income of members or beneficiaries of the SMSF.
Are there any restrictions?
Yes. We’ve mentioned that construction loans are not available (although the SMSF can renovate using its own funds). You are also not allowed to:
- Buy a property you intend to live in (owner-occupied business premises are permitted).
- Sell a residential property to your SMSF, that you or a related party owns (commercial property is acceptable).
We will also not accept applications for SMSF loans where the fund has less than $200,000 in assets.
In addition, you should be aware:
- Only select lenders allow for refinances of existing SMSF loans.
- Liquidity requirements apply when you borrow for the SMSF.
- If you have a low SMSF balance (below $200,000), then the fees associated with running an SMSF may outweigh the returns.
At OzBroker, we can work through the details of your proposed transaction to make sure it complies with legal rules and regulations.
Where can you find low interest rates?
It really depends on the lender that you’re working with - and, as is so often the case, your personal circumstances.
“Borrowing money” versus “maintaining a borrowing”
One way to lower your interest rates is to loan to the “bare trust” or “holding trust”. This option is available only with select lenders - but the good news is that OzBroker can help you find the best one for your requirements.
The conventional transaction is defined as “borrowing money”: the loan is made to the SMSF trustee, who doesn’t hold legal ownership of the property.
However, when “maintaining a borrowing” - the bare trust receives the loans, qualifying you for higher LVRs and lower interest rates.
To meet compliance requirements:
- The bare trust trustee must be a company or company director
- The SMSF trustee and the trustee of the bare trust must make a formal agreement.
Are there no-deposit SMSF loans?
No. You’ll definitely need a deposit - in fact, you’ll be forking out a minimum of around 25% to cover the 20% deposit, along with additional costs such as stamp duty.
Note, you can use existing superannuation as your deposit. Say, you already have $100,000 in a managed super fund - you can transfer this to your SMSF to be used as a deposit.
Do banks look at the beneficiaries?
In the case of new trusts, some lenders will. They’ll take into account what they’re earning, what their super contributions have previously been - and what they are planning to contribute in future. The latter is not only assessed according to what they can afford but what is allowed by the ATO - since maximum limits apply.
You can expect a loan application to be declined if contributions in excess of these amounts are used to establish that your SMSF can make the repayments.
Will the lender always accept super contributions in an assessment?
Not always - unfortunately, a lender may not accept the contributions of those approaching the retirement age. In the case of those without a personal income (and hence, no super contributions), the loan amount or term might be reduced.
Can a lender accept other forms of income?
There are differences in what lenders will - and won’t - accept in their assessment. Income from shares and interest, for example, might be included in an assessment. Any assets you are selling to finance a deposit can’t be included.
Can OzBroker help me get approval?
If you meet the right criteria - we can help you get there! It’s strongly recommended to engage with a mortgage broker like us - particularly with these SMSF loans. As we’ve said, this type of lending is relatively new - and quite complex. There are big differences in fees and interest rates. You will also find additional costs involved because some banks process these loans with commercial or business banking departments.
We can also help you find benefits such as lenders that provide an offset account with your mortgage - especially important for those with a lot of cash in their SMSF. This account is linked to your home loan account - you’ll only be charged interest on the balance of the home loan, minus the offset account balance. That amounts to a big saving - and a way to pay off the loan more quickly.
Please feel free to contact OzBroker for your initial consultation and get the ball rolling on your SMSF application!