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SMSF Loans

How Much Can I Borrow?

How Much Can I Borrow?

We can assist you with your loan applications for various types of loans within your SMSF:

  1. Standard SMSF Investment Loans: You can potentially borrow up to 80% of the property’s value.
  2. Commercial Property Loans: You can borrow up to 75% of the property’s value for non-specialized securities.
  3. Discounts: It’s worth noting that most lenders add a margin to their standard residential loan rates for SMSFs, and these margins can vary significantly.
  4. Low Documentation (Low Doc) Loans: SMSF low doc loans have limited availability and come with several restrictions.
  5. Bad Credit Loans: You may be able to borrow up to 80% of a residential property or 70% of a commercial property with an SMSF bad credit loan.
  6. Standard Investment Loan Rates: Availability of standard investment loan rates is subject to specific criteria that your SMSF structure must meet.
  7. Unusual Security or Income Types: Specialized lenders can provide solutions for cases involving non-standard security or income types.
  8. Construction Finance: Please be aware that SMSF construction finance is not an option.
  9. Lending Policies: Lending policies for SMSFs vary among different lenders, particularly in terms of how they evaluate your ability to repay the loan.

How Will Banks Assess My Borrowing Capacity?

The primary challenge most SMSF loan applicants face is demonstrating that their trust has sufficient income to support the loan.
Typically, banks will assess the trust’s current income based on its last two years’ tax returns and then determine whether this income, in addition to the projected rental income, is adequate to service the debt.
Some lenders may consider the income of SMSF members or beneficiaries to support the application if a personal guarantee is provided.
You can use our SMSF borrowing power calculator to understand how some of our partner banks would evaluate your situation.

Are There Any Limitations?

Certain restrictions on SMSF loans may prevent specific transactions from occurring. For instance:

  1. Construction Loans: SMSF construction loans are not available. However, your SMSF can fund renovations from its own resources without using additional borrowed funds.
  2. Owner-Occupied Properties: It’s important to note that you cannot purchase a property within your SMSF with the intention of living in it as your home. Owner-occupied business premises are an exception.
  3. Selling to SMSF: You are not allowed to sell a residential property to your SMSF if you or a related party owns it. Commercial property, on the other hand, is permissible.

In cases of a low SMSF balance, the fees associated with managing the SMSF may outweigh the returns. In such situations, consult with your financial planner to assess the cost-benefit ratio and consider alternative investments like shares or managed super funds until your super balance increases. It’s also advisable to consult with your accountant or financial planner to ensure your intended transaction aligns with lender rules and government regulations.

How Can I Obtain Approval?

Each bank employs its own unique approach to assessing SMSF loan applications. If your current bank cannot assist you, please get in touch with us. Our team of mortgage brokers, specializing in SMSF and limited recourse loans, will help you find a suitable solution.

Mandatory Bare Trust for SMSF Loan

In a standard SMSF borrowing arrangement, the lender extends the loan to the SMSF trustee, who does not hold legal ownership of the property. This is referred to as borrowing money.

One of our lenders will lend to the trustee of the bare trust or holding trust, which allows you to qualify for higher loan-to-value ratios (LVRs) and lower interest rates. This is known as maintaining a borrowing.

To meet compliance requirements under the SIS Act, there must be an agreement between the SMSF trustee and the trustee of the bare trust.

It’s crucial to consult your accountant when considering such an agreement. Additionally, the bare trust trustee must be a company or company director.

When assessing the trustee’s borrowing capacity, the lender will consider the director’s income or the trustee company’s latest profit and loss statement, including any rental income.

Why Use a Mortgage Broker?

Securing an SMSF loan can be a complex process, and you may not have direct access to lenders. Therefore, it’s advisable to work with a professional who specializes in SMSF loans. A mortgage broker with expertise in SMSF loans can assist you in preparing an application that maximizes your chances of loan approval.

Many major banks withdrew from the SMSF market in 2018, so non-bank lenders typically provide this type of loan. While minor differences exist among various lenders for standard home loans, the variations in fees and interest rates for SMSF loans are substantial. Some major banks process SMSF loans through their commercial or business banking departments, which tend to have higher costs and may charge more for their loans.

Furthermore, not all lenders offer an offset account with your SMSF mortgage, which is essential if you hold a significant amount of cash in your SMSF. An offset account allows you to pay off the loan more quickly and save on interest costs.

SMSF Loan FAQs

What Is A Self-Managed Superannuation Fund (SMSF)?

An SMSF is a special type of trust that people can set up to manage their own superannuation. Like a normal super fund, your employer contributions still get paid into the fund, and you can make additional contributions as you see fit.

However, unlike a normal super fund, the trustee (either you or your company) has direct control over the assets that your superannuation is invested in. Many people also use their SMSF to help plan for their retirement and assist with tax planning.

When Is An SMSF Allowed To Borrow Money?

Certain laws restrict SMSFs from borrowing money and dictate the recourse available to the lender in the event of the trust’s inability to meet repayment obligations. Borrowing within an SMSF must adhere to these guidelines:

  1. The asset must be one that the SMSF could legally acquire with its own funds.
  2. The asset is held in trust for the SMSF using a security trust (known as a security custodian).
  3. The SMSF obtains a beneficial interest in the asset from the outset.
  4. The SMSF has the right to acquire legal title from the security trustee upon full repayment of the loan.
  5. The lender’s recourse should be limited to the specific asset financed. In the event of a loan default, the lender must not have the ability to claim any other assets in the fund.
  6. Each borrowing arrangement should pertain to a “single acquirable asset.” In the case of strata titles or subdivisions, each title is regarded as a separate asset.

Why do most banks avoid lending to super funds for investment properties?

Most banks tend to avoid lending to super funds for investment properties due to several reasons:

  1. Smaller Market Size: The market for super fund loans is relatively smaller compared to traditional residential mortgages. Banks typically focus on larger markets that can generate more significant profits.
  2. Complexity of Trust Loans: Self-Managed Super Fund (SMSF) loans are more complex than standard mortgages. They involve unique structures and regulations, which can be challenging for banks to navigate.
  3. Limited Recourse: Lenders in SMSF loans have limited recourse, meaning that if the borrower defaults, they can only recover their funds from the asset held by the super fund. This limited security can be seen as a higher risk for lenders.

However, not all lenders view super fund loans in the same way. Some lenders specialize in providing loans to super funds and are more comfortable with the associated complexities and risks. These lenders may offer competitive loan packages tailored to the specific needs of super funds.

Major banks typically do not offer SMSF loans, but non-bank lenders specialize in providing such loans. To find the right lender for your SMSF loan, it’s advisable to work with a specialist mortgage broker who understands the unique requirements and can connect you with lenders who offer suitable loan options.

When should you apply for an SMSF loan, and how long does it take to get approval?

It’s recommended to apply for an SMSF loan at least two weeks before you begin looking for a property. While the process can be expedited if necessary, allowing additional time is ideal to prevent delays and disappointments.

The approval process for SMSF loans can take longer compared to standard residential mortgages. Many borrowers take about a week to gather the necessary documents for their loan application. Once these documents are submitted to the bank, it can take an additional week or more for the bank to assess and grant pre-approval. The complexity of SMSF loans contributes to the longer processing times.

How are SMSF loans typically structured, and can you secure low interest rates?

SMSF loans are typically structured with the loan made out to the trustee of the SMSF in their capacity as a trustee. The security custodian is listed as the mortgagor. This structure ensures that the lender has limited recourse, meaning they can only claim the asset held within the SMSF in case of a default. Some lenders may require personal guarantees from the members of the superannuation fund, while others may not require guarantees, especially if the loan is for a lower Loan-to-Value Ratio (LVR).

The interest rates for SMSF loans can vary depending on the lender, the LVR, and other factors. Generally, a higher down payment (higher LVR) can lead to lower interest rates, while a lower down payment (lower LVR) may result in higher interest rates. To secure low interest rates, it’s essential to compare offers from different lenders and work with a specialist mortgage broker who can help you find the most competitive rates.

Are there no-deposit SMSF loans?

Contrary to a common misconception, there are typically no no-deposit SMSF loans available. To purchase a property within an SMSF, you generally need a minimum of 24% to 25% of the property’s purchase price to cover the 20% deposit and other costs like stamp duty. However, the existing balance within your superannuation can serve as the deposit. For example, if you have $100,000 in a managed super fund, you can transfer this amount into your SMSF to use it as the deposit for buying a property. This approach eliminates the need to save a deposit in your own name, which is typically required for traditional investment properties outside of an SMSF.

Do banks consider the beneficiaries of the SMSF when assessing loans?

For newly established SMSFs, some lenders may consider the current income of the trust beneficiaries, their previous super contributions, and their proposed super contributions when assessing loan applications. The lenders will assess whether the proposed contributions are within the maximum amounts allowed by the Australian Taxation Office (ATO) and whether they can be made without causing financial hardship. Contribution limits can change from year to year, and loan applications that require contributions exceeding these limits may be declined.

Do lenders accept super contributions and other forms of income for SMSF loans?

Lenders may accept super contributions on a case-by-case basis when evaluating SMSF loan applications. The acceptance of super contributions can depend on the lender’s policies and the specific circumstances of the borrower.

Regarding other forms of income, such as income from shares or interest from current assets within the trust, some lenders may be more flexible than others. However, many banks may not include this type of income in their assessment, especially if the assets generating the income are intended to be sold to provide the deposit for the property purchase. To determine whether a lender will accept your income sources, it’s advisable to work with a specialist mortgage broker who can assess your situation and connect you with suitable lenders.

Can an SMSF purchase a property from your personal portfolio?

Your SMSF can purchase a commercial property that you already own. However, your SMSF is generally not allowed to purchase a residential property that is owned by you or a related party. Doing so could result in significant penalties, including the payment of a substantial percentage of your superannuation fund balance as penalty tax. To ensure compliance with regulations and avoid penalties, it’s advisable to seek professional advice from an accountant or financial advisor specializing in Self-Managed Superannuation Funds (SMSFs) before any property transactions.

How can you apply for an SMSF loan, and what should you consider before setting up an SMSF?

To apply for an SMSF loan, it’s recommended to work with a specialist mortgage broker or bank manager who understands SMSFs and is well-versed in lending to them. These professionals can guide you through the application process and help you navigate the complexities of SMSF loans.

What To Consider Before Setting Up An SMSF

Before setting up an SMSF, there are several factors to consider:

  1. Cost-Benefit Analysis: Evaluate whether the fees associated with running an SMSF outweigh the potential returns. Compare the costs of managing an SMSF, including accounting and audit fees, against the fees charged by a standard retail super fund (typically around 1-2%).
  2. Owner-Occupied Properties: It’s important to note that you cannot purchase a property within your SMSF with the intention of living in it as your home. Owner-occupied business premises are an exception.
  3. Investment Expertise: Assess your ability to make effective investment decisions. If you lack experience in personal investment, managing your SMSF may not be the best option. SMSFs are better suited to individuals with investment expertise.
  4. Fund Security: Be aware that there is no compensation available for lost funds in an SMSF. Unlike other super funds, there is no safeguard in place to recover lost money.
  5. Knowledge and Time: Managing an SMSF requires a deep understanding of regulations, tax requirements, and investment markets. Ensure that you have the knowledge and time to effectively manage your fund’s activities. Seek advice from experts or accountants with SMSF expertise if needed.

Setting up an SMSF involves several steps, including choosing a fund name, selecting the right trustee and trust structure, preparing an investment strategy, obtaining necessary tax and business registrations (Tax File Number and Australian Business Number), and opening a bank account for the fund.

Setting Up An SMSF

Setting up a Self-Managed Super Fund (SMSF) involves several important steps and considerations:

  1. Fund Name and Trustee Selection: Begin by choosing a name for your SMSF. You should consult with your accountant or adviser to set up the correct trustee and trust structure that best suits your needs.
  2. Investment Strategy: Develop a comprehensive investment strategy for your SMSF. This strategy should outline your fund’s objectives, risk tolerance, and how you plan to invest the fund’s assets to achieve retirement benefits for members.
  3. Regulation and Taxation Requirements: To meet regulatory and taxation requirements, you’ll need to:
    • Apply for the trust to be regulated.
    • Obtain a Tax File Number (TFN) and an Australian Business Number (ABN) for the SMSF. These applications can be submitted simultaneously.
    • Establish a bank account for the SMSF. Many banks will require you to provide certified copies of the signed trust deed, TFN certificate, and ABN certificate before opening an account.
  4. Rolling Over Current Super Balance: If you have existing superannuation savings in another fund, you’ll need to contact that fund to initiate the rollover process. This typically involves transferring your current member balance to your newly established SMSF. The processing time for rollovers can vary but may take anywhere from 2 weeks to 2 months, depending on the fund. Certified copies of the signed trust deed and a letter from the trustee may be required during this process.

SMSF Features

Key Features and Rules of SMSFs:

  1. Management of Investments: All investments within the SMSF should be managed for the benefit of the fund members. Personal financial affairs or interests should not be mixed with SMSF investments. Assets must be held in the full legal name of the SMSF to comply with Australian Taxation Office (ATO) rules.
  2. Contributions: SMSFs can accept contributions from fund members. However, there are restrictions based on the member’s age and contribution caps, which change annually. Penalties apply for over-contributing, so it’s essential to plan contributions carefully.
  3. Administration: As the trustee of the SMSF, you are responsible for meeting all reporting requirements, maintaining records of the fund’s activities, and ensuring compliance with tax regulations. An accountant can assist with annual income tax, reports, and audits.
  4. Access to the Fund: Members can access their superannuation benefits when they reach their “preservation age,” retire, or meet other conditions of release. Accessing funds before reaching the required age is generally challenging, except in cases of severe financial hardship.
  5. Taxation: Superannuation income within an SMSF is typically taxed at a rate of 15%. However, higher rates may apply if you receive “special income” from investments in entities related to you or if you receive a notice of non-compliance for breaching super fund rules.

Rules Relating To Self-Managed Super Funds

  • SMSFs must be run with the sole purpose of providing retirement benefits to members.
  • They cannot be used to gain early or improper access to superannuation.
  • SMSFs can borrow, provided that specific requirements are met.
  • The SMSF trustee structure can involve a company owned by all members or individual trustees.
  • An SMSF can have between one to six members.
  • The fund must maintain and follow its investment strategy.
  • The trustee must ensure compliance with ATO regulations and guidelines.

Tips for Managing an SMSF:

  • Fulfill all administrative obligations, including record-keeping and taxation requirements.
  • Engage the services of an auditor as required by the ATO.
  • Maintain accurate financial statements and records.
  • Stay informed about relevant laws and regulations to ensure compliance.
  • Seek professional advice before entering into any commercial or financial arrangements involving your SMSF.
  • Do not access your SMSF unless you have met the required conditions, as premature access can lead to significant penalties for both the fund member and the fund itself.
  • The trustee must ensure compliance with ATO regulations and guidelines.

Setting up and managing an SMSF requires careful planning, adherence to regulations, and a thorough understanding of your responsibilities as a trustee. Consulting with professionals, such as accountants and financial advisers, can be invaluable in ensuring that your SMSF operates effectively and in compliance with all legal requirements.

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