When it comes to saving for your retirement, there are two types of Australians; those who like to set-and-forget their investments, and those who like to take charge of their investment strategy. And for the type of person who wants more control, a self-managed super fund is likely their course of action.
Property is one of the most popular investment options in Australia, historically generating a return over time, so it’s a no-brainer that SMSF members would turn to investment property as a competitive asset to add to a portfolio.
However, not many can pay for a property in cash (particularly in Sydney or Melbourne), so taking out a mortgage to fund this purchase can be necessary, which is typically facilitated through a self-managed super fund home loan.
What is a self-managed super fund home loan?
To understand how self-managed superannuation fund home loans work, it’s worth going through the basics.
A self-managed super fund (SMSF) is, as the name suggests, a type of fund in which the investment, the insurance, and all high-level decisions are managed by those within the fund. This is different to standard superannuation funds, in which you allow the company to dictate these decisions.
Self-managed superannuation fund home loans are a type of mortgage available to those in a self-managed super fund (SMSF) for the purpose of purchasing property as an investment. SMSF borrowing can be approved for residential or commercial properties. Just as any other loan, you will need to meet loan repayments, and will be charged an interest rate on top of your repayments.
How do SMSF home loans work?
In Australia, there are strict regulations around what investment options you can choose for the SMSF, and how the funds earned on your investment may be used, as your SMSF must pass the ‘sole purpose test’ to be eligible for super fund tax concessions.
According to the Australian Taxation Office (ATO), your fund needs to be “maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement”.
If the SMSF trustees agree to purchase property, they will typically leverage any funds available as collateral as a deposit, and take out a home loan to purchase the property. This is also referred to as limited recourse borrowing arrangements (LRBA), and is another way of describing taking out a loan from a third-party (lender or bank) to purchase a single acquirable asset for SMSF trustees with the loan.
In the event of a default on the loan, an LRBA, sometimes referred to as a non-recourse loan, will also ensure the lender may pursue the asset (or collection of identical assets with matching market value) purchased, and cannot pursue other assets in the SMSF.
This is similar to an investor taking out a mortgage to purchase property, and the lender being able to seize this asset as collateral if the investor were to default. However, there are more strict rules surrounding this process to ensure the sole purpose test is being met.
- The property can only be used to generate retirement benefits to fund members
- The property cannot be be acquired from a member, or related party member
- The property cannot be used to live in or rent out by a fund member or related party member
- A commercial property purchased by your SMSF can be leased by your business (if the lender approves).
If you live in the property you purchase through the SMSF, or receive an income from it through leasing it out, it is considered a ‘pre-retirement benefit’. This is considered a serious offence by the ATO, and breaching this can result in criminal penalties.
As with investments in Australia, the SMSF will likely need to pay capital gains tax on property purchased. This is typically determined at the time the asset is disposed of (sold or transferred), and in some instances when the contract of sale is signed.
It is worthwhile speaking with legal counsel and engaging in professional financial advice before making any investment decisions around taking out a self-managed super fund home loan.
Who are SMSF home loans for?
Self-managed super fund home loans are designed for an SMSF and its members to purchase property as a form of long-term investment for their retirement savings. An SMSF can have a maximum of six members (typically belonging to the same family).
It is not an ideal loan option for those who are looking to purchase their first home, or purchase property to rent out and earn any pre-retirement benefits from. If you are looking into home loan options for residential property, it may be worthwhile instead comparing our competitive consumer home loan options.
What do you need to apply for a SMSF home loan?
The lending criteria for self-managed super fund home loans is much more strict than that of your standard mortgage. This is because the providers must ensure that the purpose of the investment, as outlined by the SMSF, is considered safe – particularly over a long-term. It also needs to ensure that the SMSF is meeting loan liquidity requirements.
SMSF loan liquidity requirements
SMSF loan liquidity requirements, generally speaking, mean that lenders look to see if the SMSF has 10-20% of the property value in cash within the SMSF account. This helps to ensure the SMSF has the capacity to afford any unforeseen expenses that might arise after settlement, such as repairs and renovations, legal expenses, fines, or not earning a rental income for some time.
Prior to this requirement being brought in in 2016, an SMSF was able to put every last dollar in its bank account toward the purchase of an SMSF property. Say a SMSF had $300,000 in its account, it could use all of these funds as a 20% deposit, plus settlement costs, to take out a home loan to purchase property. The SMSF bank account balance would now be zero.
Nowadays, SMSF loan liquidity requirements mean that the fund must have anywhere from 10-20% of the cost of the property’s value (not the loan amount) in its bank account, as well as the 20% deposit, stamp duty and any settlement costs. This has understandably reduced the borrowing capacity of SMSFs in Australia, and the pool of assets the SMSFs can purchase.
Before the SMSF applies to purchase any asset, double check that you’ve assessed your budget carefully to ensure you are meeting loan liquidity requirements.
As with any loan, you’ll need to provide the bank or lender with documentation to ensure that your SMSF is registered and that it can comfortably service the repayments on the property loan.
This may include, but is not limited to:
- A certified copy of the SMSF Trust Deed
- A certified copy of the Custodian Trust Deed
- 3 years of SMSF audited financial statements
- 12 months of SMSF bank statements
- Rental estimates
- Full copy of contract of sale
How much can you borrow with a SMSF home loan?
You may be wondering how much you can actually borrow for a SMSF home loan. Depending on the bank or lender, the SMSF and its funds, a standard SMSF investment loan will typically allow you to borrow up to 75% of the property’s value, with the maximum value depending on the lender you choose.
However, at Reduce Home Loans, we provide competitive SMSF home loans that allow you to borrow up to 80% of the property’s value, in some cases. For example, if you’re purchasing property in a metro postcode, you may be eligible to qualify for an 80% loan-to-value ratio (LVR) SMSF loan.
And if you’re looking for flexibility in the form of helpful loan features, like an offset account, you may want to consider our Capitalizer SMSF Loan. With a borrowing capacity up to 80% of the value of the property available, your SMSF may also take advantage of a 100% offset account to reduce the interest charged on the loan.
For more information on our suite of SMSF loan products, or to speak to one of our helpful experts, please don’t hesitate to get in touch today.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.