What is an SMSF loan?
Self Managed Super Funds (SMSF) are set up for the purpose of taking control of your superannuation so you can invest it according to your preferences.
You can use a SMSF to borrow money and purchase an residential or commercial properties in Australia.
Can I use a SMSF to build a property?
Investing in property using a SMSF has some very strict rules and regulations. An SMSF can only purchase a single acquirable asset or one title.
This means, you can use your SMSF to invest in a residential or commercial property that is off the plan (single contract) or an established property. You cannot use a SMSF to purchase vacant land and then build.
What’s the difference between a SMSF loan and a standard home loan?
There is a significant difference between the two such as regulations regarding the structure of the loan, the available home loan products, the assessment and approval process.
SMSF loans are structured under what’s known as Limited Recourse Borrowing Arrangement (LRBA). This means the bank can only go after the property in the SMSF. For example, if the SMSF can no longer meet the loan repayments and the loan goes into arrears or default, the bank can only recover any losses against the property asset in the SMSF.
How does the bank assess the borrowing capacity of a SMSF?
From a borrowing capacity, the assessment of a SMSF loan is actually more straight forward than the assessment of a individual.
The income used in the assessment of your SMSF borrowing capacity are based on:
Superannuation guarantee contributions over the last two years – this isn’t just limited to contributions into the SMSF, contributions into your super overall whether it’s in a SMSF or in a retail or industry superfund.
Voluntary contributions – these are contributions you voluntarily make into your superfund that is not part of your employer’s superannuation guarantee. Some banks will include this in the borrowing capacity assessment on the condition that you can prove this is regular and you can maintain the financial ability to continue these contributions.
Rental income of the proposed purchase property – if the property is currently rented, the current lease agreement will be used to calculate the rental income for borrowing capacity purposes. If the property is not leased or is off the plan, a bank ordered valuation will determine the market rental income of the property.
The expenses used in the assessment of your SMSF borrowing capacity are based on:
Ongoing administration costs – the annual cost of maintaining your SMSF. This includes the costs associated with completing tax returns, audits, compliance, accounting fees etc.
Property related expenses – the annual costs associated with maintaining the property which includes, council rates, utilities, land tax (if applicable), management fees, etc.
As you can see, the borrowing capacity calculation for a SMSF is much more straight forward and simpler compared to a traditional home loan. This is because the SMSF does not have any financial dependents, there are no living expenses to worry about, and it also doesn’t have credit cards, personal loans, car loans or HECS debt!
What is the percentage I am able to borrow using a SMSF?
For residential properties, most lenders will go as high as 80% LVR (Loan to value ration) but your financial planner may recommend that you keep the lending at a lower level such as 60% or 70% for the purpose of ensuring the rental income and your contributions will cover the loan repayments.
For commercial properties, depending on the type of commercial property it is, such as a retail store front, industrial warehouse, specialised commercial property etc, the LVR ranges between 60% to 80% LVR as well.
How should I get started if I want to consider using a SMSF to invest in property?
An SMSF may not be suitable for everyone, so it’s important you seek and obtain personal financial advice to determine whether this vehicle is suitable for you.
The first step should be speaking to a financial adviser that specialises in SMSF so they can help you determine if this option is suitable for you and help you understand all the pros and cons on using an SMSF to invest in property.
Once you determine that it is suitable for you, the next step is to speak to a mortgage broker to understand your borrowing capacity and what budget you are able to purchase, along with all the details such as how much deposit you’ll need, what the repayments will be and the estimated rental income you’ll receive.
After understanding all of the above, the final step is to start the process of setting up your SMSF which can be done with your financial planner or with your accountant.
They will set up your SMSF and give you the documents that you’ll need to open up a bank account for your SMSF.
You’ll need to start the process of rolling over your super from your current fund into the SMSF so that once you find a property, you will have the funds in your SMSF to pay the initial deposit to purchase.
