SMSF Property Loan
If you’re considering a SMSF home loan, you may have noted how complex the borrowing process can be. Indeed, it is an alternative method to financing home purchase because it gatekeeps your retirement savings that isn’t necessarily meant to be invested in property.
From the stringent rules and regulations to the nature of the loan, let’s have a comprehensive review of SMSF property loan to make sure you know how they work.
What is SMSF?
A Self-Managed Super Fund (SMSF) home loan is a financial investment arrangement that enables members of a self-managed superannuation fund to purchase residential property using their retirement savings.
Unlike traditional super funds, SMSFs allow individuals greater autonomy over their investments as to how they plan to diversify.
SMSF property loan leverages your retirement savings for a potentially higher ROI in the long term. The returns, either capital gains or rental income, are funneled back into the super fund.
The thing is, only a number of lenders offer SMSF property loans, and the regulations are notoriously complex, as borrowers do not have direct access with lenders.
Mortgage specialists like Intellichoice work with a network of lenders that can provide investment opportunities for SMSF home loans.
How does SMSF home loan work?
Investing in property using a Self-Managed Super Fund (SMSF) involves several steps and compliance requirements. Here’s a general outline of how you can invest in property through an SMSF:
| Establish an SMSF | Firstly, you need to set up an SMSF or become a member of an existing SMSF. This requires creating a trust deed, appointing trustees, and registering the fund with the Australian Taxation Office (ATO). |
| Agree on a property investment strategy | As trustees, you are the ones responsible for formulating an investment strategy that aligns with the SMSF’s objectives. This strategy should consider factors such as risk tolerance, diversification, member retirement goals, and returns. |
| Ensure compliance | SMSFs must comply with various ATO regulations, including annual audits, reporting obligations, and restrictions on where and what to invest in. |
| Contribute funds | SMSF members can contribute funds through personal contributions, employer contributions, or rollovers from existing superannuation accounts. These contributions, along with any existing funds within the SMSF, can be used to finance the SMSF home loan. |
| Set up a LRBA | SMSFs can take out a loan through LRBA (limited recourse borrowing arrangements) where the property is held in a separate trust, known as bare trust, and the SMSF acts as beneficial owner. LRBA allows the SMSF trustees to borrow from a third party lender to buy a single asset or multiple properties of the same market value – to be held in a separate trust. Any investment returns go back to the trustees. Should the loan be defaulted, the bank is limited to that singular asset. |
| Repayments and home loan management | Loan repayments, both principal and interest, are generally made from the SMSF cash flow. Hence, member contributions and rental income are sufficient to keep the loan repayments and property-related expenses met. |
It’s crucial to review the ongoing compliance, including insurance, taxes, and capital gains. Review your SMSF property loan against what your goals are and stay updated with the latest ATO regulations to ensure that you remain compliant.
Bare trust for SMSF property loan
A bare trust, also known as a custodian or a holding trust, is a legal structure used in conjunction with SMSF loans. It is a separate trust established solely for the purpose of holding the property on behalf of the SMSF.
Bare trust is established because the property cannot be directly owned by the SMSF until the loan is paid off fully. To comply with the ATO regulations on SMSF investment, the property is held in a separate or bare trust.
The bare trust structure keeps the lender’s right to the property held within that trust. In the event of a mortgage default, the lender’s rights are restricted to the property and does not extend to the other assets within the SMSF portfolio.
Although legal ownership is held by the bare trust, the SMSF trustees have full control over the property. They can decide to rent, sell, renovate, and make other changes as outlined in the investment strategy.
There should be an agreement between the SMSF trustee and the bare trust trustee (should be a company or company director) to meet SIS Act compliance requirements. The process is more complex than a standard investment loan or home loan, so it’s ideal to have a SMSF property loan expert to navigate the process and weigh the benefits of SMSF loans.
When to use SMSF for property loan
Investing the super funds can potentially bring a healthy ROI, so it’s a worthwhile discussion if you are ready for the complex hoops and regulations.
You can only apply for a loan in these instances:
- The asset is held on trust for the SMSF by a bare trustee;
- It is an asset that the SMSF could legally acquire given enough funds;
- It is an asset that is purchased with the sole purpose of generating retirement benefits to SMSF members
- The borrowing arrangement is for a “single acquirable asset”, otherwise, strata or subdivisions will each be considered a separate asset;
- The lender has limited recourse against one particular asset.
Why don’t banks lend to SMSF?
Generally, there is a smaller market for super funds borrowing for investment properties. Aside from that, there are convoluted regulations around SMSF and trust loans, and so from a lender’s perspective, it entails more work for lower profits.
Big Four banks and AMP, Macquarie Bank, and St. George all previously offered SMSF loans, but are no longer have this loan product. Although, there are still a few specialist lenders offering SMSF property loans.
Borrowing through an SMSF is riskier than going for a traditional home loan or investment financing. Lenders recognize that the SMSF will need constant, substantial cash flow to avoid any issues with repayments.
These reasons make SMSF property loan a more niche product that not all lenders will offer.
Intellichoice can help you access competitive SMSF home loan packages that will have the terms most suitable for your super fund. You can set up an appointment today with our mortgage brokers.
Are there advantages to an SMSF property loan?
While there is a lot of regulations to consider, there are certain benefits to using SMSF:
- Managing own investments – SMSF home loans offer an opportunity to diversify retirement savings beyond traditional asset classes such as stocks and bonds. Property investments can provide potential long-term capital growth and rental income, potentially enhancing the overall portfolio returns.
- Additional contributions – Trustees can make additional contributions, although like many in the SMSF, these have limits depending on how old the person is and their respective contribution limit.
- Tax incentives – SMSFs benefit from concessional tax treatment, including lower tax rates on rental income and capital gains. Loan interest payments made by the SMSF may be tax deductible.
- Retirement income stream – Members can access the fund once the release conditions are met. Owning an investment property through an SMSF can provide a potential income stream in retirement, as rental income generated by the property can contribute to the fund’s cash flow.
SMSF loan considerations and risks
As mentioned, SMSF loans are subject to strict regulations. Here are potential drawbacks to planning to borrow using SMSF:
- Strict Compliance Requirements – SMSFs are subject to various regulations and compliance obligations imposed by the Australian Taxation Office (ATO). Trustees must ensure they meet all legislative requirements, including restrictions on related-party transactions and investment strategies.
- Limited Liquidity – Investments in property can tie up a significant portion of retirement savings, potentially limiting liquidity and diversification options.
- Property Market Risks – Property values can fluctuate, and rental income may vary, potentially affecting the SMSF’s overall performance. It is essential to consider the long-term viability and potential risks associated with the chosen property.
- Professional Advice – Establishing and managing an SMSF home loan can be complex. It is advisable to seek professional advice from financial advisors, accountants, and legal experts experienced in SMSF regulations and property investments.
SMSF loans certainly aren’t as straightforward as other home loans. If you have professionals with specialized knowledge, it’s more likely that the money is managed and invested effectively. But without the experience and complete knowledge of SMSF strategies and risks, managing the super funds may not bring the maximum returns.
We have mortgage brokers well-versed in Self Managed Super Funds. Our mission is to provide a thorough consideration of compliance obligations, investment decisions, loan terms, and legal risks. We’re here to be your helping hand in customizing SMSF loans.
Trust Intellichoice to access the best advice for how to go about your SMSF property loan.
