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Can An SMSF Borrow Money?

With the evolution and continued growth of the Self Managed Super Fund market the Australian lenders have also continued to enhance their borrowing products to accommodate the demand and growth in this market.

We provide a brief explanation of a SMSF loan followed by some of the characteristics of the lenders products:-

Introduction

A SMSF loan is exactly what the name suggests it is a loan to your SMSF Trustee.

The SIS Act generally prohibits the trustee of a regulated superannuation funds, which includes SMSF’s from borrowing money. However, it does allow an SMSF trustee to borrow money to acquire certain kinds of assets, including residential investment and commercial investment property, provided certain conditions are met.

One of these conditions is that any rights of the lender or other person against the SMSF trustee is limited to the asset acquired with the borrowed money. This is what is often referred to as a “limited recourse” loan.

Your SMSF can borrow funds for the purpose of financing or refinancing the acquisition of a residential /commercial investment property.

We have inserted a table below on how the borrowing structure and flow of funds with any lender would look like. (If you require any guidance on this table we would be pleased to assist)

Important

  • The vendor cannot be a related party of the SMSF
  • The Security Trust cannot hold any property other than the one investment property, therefore if you wish to invest in multiple investment properties a separate Security Trust is required to be set up for each investment.
  • Financial  and Legal advice is required by the lenders for all parties to the loan facility
  • SMSF trustee may be one or more individuals which can include family members or a corporate trustee (which is a non trading company that has been set up for the sole purpose of being the SMSF Trustee)

Lender Products

Maximum loan to value ratio is 80% of the value of the residential security property and 65% of commercial security.

  • Minimum loan term is 10 years and the maximum loan term for residential is 30 years or 15 years for commercial. A 5 year interest only period is available and may be extended for a further 5 years
  • No redraw is permitted
  • Repayment can be made weekly, fortnightly or monthly.
  • 100 Offset account is available, allowing you to place any additional Super funds to directly offset the interest cost on the SMSF loan.
  • Fixed and Variable Rate options are available

Property Restrictions

  • Must be an investment property (i.e it cannot be owner occupied)
  • Must be already constructed and have its own separate title details (ie no construction loans)
  • Must be fully serviced by power, water, electricity and sewerage and have road access
  • No company title, serviced apartments or display homes
  • No more than 2 residential units on one title
  • Loans cannot be used for renovations or capital improvements

Loan Servicing

  • Loan servicing is typically demonstrated by the rental on the proposed purchase/security together with demonstration of your past Superannuation contributions, generally these two methods are more than sufficient to meet the lenders requirements and therefore no further information is required unlike a traditional Home Loan or investment Home Loan.

Frequently Asked Questions

Am I able to refinance an existing SMSF loan?
Yes you can subject to the same security being used under the refinance.

Can I replace the residential investment property before my loan is repaid?
No, you cannot provide any replacement security for your loan before the loan is repaid in full.

Whose name is the loan held in?
The borrower is the SMSF Trustee, which can either compromise individual trustee (for example; Jay John & Jackie Johns as trustees for the Johns Self managed Super funds) or a corporate trustee (for example; Blue Spark Pty Ltd atf the John Self Managed super fund).

How Many properties can be used a security for a SMSF loan
One, your SMSF can only use the one property as security for each loan.

Family Options

An SMSF can be owned by a combination of up to 4 people, so long as they are family members. Many couples have around $40,000 each in their current super fund. If they get together with other family members who have similar balances, then purchasing a property together under their SMSF becomes feasible.

For example, we recently had a couple who wanted to buy an investment property. For various reasons, a traditional investment loan was unavailable to them, BUT when we looked deeper into their super balances, we were able to offer them the option to set up an SMSF. They are now in a position to buy their investment through their Self-managed super fund.

 

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Author Tom Thiele
Source: AMP in conjunction with Global Finance

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