A Self-managed Super Fund Home Loan, also known as an SMSF home loan, is a loan product that enables you to leverage your SMSF to borrow funds to buy residential investment property.
This can be an effective strategy to enhance your superannuation holdings and may also serve as a potential income stream upon retirement.
An SMSF can also borrow funds to buy commercial properties. This article focuses on SMSF loans to purchase residential investment property.
- How SMSF Home Loans Work?
- Benefits of SMSF Home Loans
- Lending Rules for SMSF Home Loans
- Key Features of SMSF Home Loan Products
- What is the Maximum Amount an SMSF Can Borrow?
- Seek Independent Advice
- Frequently Asked Questions.
How SMSF Home Loans Work?
Home loans for SMSFs, or Self-managed Super Funds, are typically set up as Limited Recourse Borrowing Arrangements (LRBAs). This means that if you are unable to keep up with your loan repayments, the lender only has rights to the specific property purchased with the loan, not to any other assets within your super fund.
This structure serves to safeguard the remainder of your SMSF investments.
Benefits of SMSF Home Loans
There are several benefits of using an SMSF home loan to purchase a property:
- Tax efficiency opportunities: By leveraging the preferential tax treatment on rental income and capital gains, acquiring a property via your SMSF could yield notable tax efficiencies.
- Diversification of investments: Property investment through your SMSF facilitates a broadening of your superannuation asset mix, offering a well-rounded portfolio.
- Increased autonomy: As an SMSF trustee, you enjoy a higher degree of autonomy over investment choices, empowering you to select property that seamlessly integrates with your fund’s investment strategy.
- Adaptability to individual scenarios: An SMSF home loan proves to be an excellent option for those who are self-employed, boast multiple avenues of income, or have exhausted their personal borrowing capacity.
- Potential for capital gains: As property values appreciateover time, the SMSF can accrue capital gains, potentially generating a significant source of income during retirement.
Lending Rules for SMSF Home Loans
The requirements for purchasing a residential property with an SMSF loan are designed to ensure that SMSFs are used for their intended purpose of providing retirement benefits to members. The requirements also help to protect SMSF members from making risky investments.
Key requirements for purchasing a residential property with an SMSF loan are:
- SMSF compliance: The SMSF must be set up and structured as a complying superannuation fund. This means that it must comply with all applicable Australian superannuation laws and regulations.
- Sole purpose test: The property purchased with the loan must meet the sole purpose test. This means that it is bought solely for investment purposes and not for personal use. The property must not be lived in or rented by a member of the SMSF or any related party of a member.
- Sufficient funds: The SMSF must have enough funds to cover the deposit, fees, and ongoing repayments. The deposit is typically at least 10% to 20% of the purchase price of the property. The fees include the lender’s application fees, valuation fees, stamp duty and legal fees. The ongoing repayments include the principal and interest on the loan, as well as any other property-related expenses, such as council rates, water rates, and land tax.
- Cash flow: The SMSF must have enough cash flow to support loan repayments and other expenses. This means that the SMSF must generate enough income from its investments to cover the loan repayments and any other property-related expenses.
- Lender requirements: The property must meet standard lender requirements for residential properties. This means that the property must be in a desirable location, have good rental potential, and be in good condition.
Key Features of SMSF Home Loan Products
Below are some key features of SMSF home loans:
SMSF home loans can be used for either purchasing or refinancing a property. The maximum borrowing amount is $4 million, and the loan-to-value ratio (LVR) is up to 80%. In a handful of cases, lenders may offer up to 90% LVR. The loan term can be up to 30 years, and there are both fixed and variable rate options available.
Borrowers can choose to make principal and interest repayments, interest only repayments, or additional repayments. Repayments can be made weekly, fortnightly, or monthly. Some lenders offer offset facilities, but redraw facilities are not available.
SMSF loans are available for properties located in inner city, metro, and regional areas. Borrowers must have a liquidity requirement of 5% to 10% of the original SMSF balance after completing the purchase transaction.
Lending policies and interest rates differ from lender to lender and subject to change without notice.
What is the Maximum Amount an SMSF Can Borrow?
The maximum amount an SMSF can borrow is generally up to 80% of the property value, with some lenders offering up to 90%. However, this may vary depending on the lender and their lending policies.
It’s important to note that borrowing capacity for an SMSF loan will also depend on the cash flow and liquidity of the fund.
Lenders will assess the ability of the SMSF to make loan repayments using rental income, super guarantee contributions from members’ employers, pre-tax and post-tax voluntary contributions from members, and other sources of income of the SMSF.
In addition to the property value and cash flow of the SMSF, lenders also consider the individual circumstances of each borrower, including credit history, employment status, and personal income.
Seek Independent Advice
Seeking professional and independent advice for an SMSF loan is a prudent step to ensure you make informed decisions and navigate the complexities of SMSF borrowing effectively.
Professional advisors, such as financial planners, accountants, and SMSF specialist mortgage brokers, possess in-depth knowledge of SMSF regulations, tax implications and lending requirements.
They can guide you through the intricacies of SMSF borrowing and help you identify the most suitable loan structure and lender for your specific needs.
SMSF home loans offer a unique opportunity to leverage your superannuation savings to invest in residential property. This strategy can potentially enhance your retirement savings and provide a source of income in retirement.
However, it is important to carefully consider the risks and suitability of SMSF home loans before taking one out. Seek professional advice to ensure you make informed decisions and navigate the complexities of SMSF borrowing effectively.
Frequently Asked Questions
What is an SMSF?
A Self-managed Super Fund (SMSF) is a private superannuation fund that is controlled and managed by its members. SMSFs are different from industry and retail super funds, which are managed by professional trustees.
The sole purpose of the SMSF is to provide retirement benefits to fund members. You can have up to six members in your fund.
Please read this detailed artilce to learn how to set up self-managed super fund to buy property.
What is a Bare Trust?
A bare trust, sometimes referred to as a custodian trust, simple trust or a nominee trust, is the most basic form of trust. In this structure, the trustee holds legal ownership of the trust assets, while the beneficiary retains equitable title.
The trustee’s role is limited to passing on the property to the beneficiary upon their instruction, without any discretionary powers or active management responsibilities.
Do You Need a Mortgage Broker to Get an SMSF Loan?
Partnering with a mortgage broker specialising in SMSF loans is strongly advised when pursuing financing for an investment property through your SMSF.
Their expertise will guide you through the intricate application process and identify the most suitable loan options tailored to your unique circumstances and help you in purchasing residential or commercial property.
Can You Use Equity from an SMSF property to Buy Another Property?
No, you cannot use equity from an SMSF property to buy another property. This is because SMSF loans are structured as limited recourse borrowing arrangements (LRBAs), which means that the loan is secured by the property itself and not by any other assets of the SMSF.
How Long Does it Take to Get an SMSF Loan Approved?
The length of time it takes to get an SMSF loan approved can vary depending on the lender and the complexity of the application. However, it generally takes one week to get together the documents required to apply for the loan, and another week for the lender to assess and pre-approve the loan. Once pre-approval is granted, the unconditional approval and the settlement process can take an additional 3-4 weeks.
What Types of Properties Can be Purchased Using an SMSF Home Loan?
Self-managed Super Fund (SMSF) Loans offer flexibility in purchasing a diverse range of residential properties; these include houses, apartments, units, and townhouses.
The property must be acquired for investment purposes. The residential property cannot be purchased from a related party nor it can be used for personal purposes.
Why Chose DotCapital for SMSF Home Loans?
Applying for an SMSF loan for purchasing or refinancing a property can be a complex process, and it’s important to have the right team behind you. Our experienced mortgage brokers can guide you through the entire application process, from understanding borrowing capacity to selecting the best lender for your SMSF.
We will work closely with you to gather all necessary documentation and ensure that your application meets the lending policies of different lenders and help you secure SMSF property loans. Contact us to discuss your SMSF home loan requirements.
The content provided in this document is general in nature and should not be construed as financial or legal advice. It is always recommended to seek professional advice before making any financial decisions. We do not provide financial planning, legal or taxation advice.