Are you a Self Managed Super Fund (SMSF) trustee, and do you want to borrow money to invest for your trust? Read on to find out what you need to qualify and how Ocean Home Loans mortgage brokers can assist in getting your SMSF home loan approved.
If you haven’t yet set up your SMSF, no problem; please read on to understand what SMSF Home Loans are all about. Ocean Home Loans mortgage brokers are experts in SMSF lending for residential and commercial investments. Please call us at 07 5593 1420, and we can discuss your options with you or enquire online. We will contact you as soon as possible.
We can also put you in touch with our SMSF partner accountants, lawyers & financial advisers, if needed, who can assist you in the setting up of your SMSF, with the knowledge that your SMSF will be structured correctly to allow borrowing for residential and commercial investment property.
What are SMSF Home Loans?
SMSF home loans are exactly what the name suggests: a loan to your Self Managed Superannuation Fund trustee.
The SIS Act generally prohibits the trustee of a regulated superannuation fund, which includes SMSFs, from borrowing money. However, it does allow an SMSF trustee to borrow money to acquire certain kinds of assets, including residential & commercial investment property, provided that certain conditions are met.
One of these conditions is that any rights of the lender or other person against the SMSF trustee are limited to the asset acquired with the borrowed money. This is what is often referred to as a “limited recourse” loan.
The security custodian trustee will acquire the property using a deposit from the SMSF and the loan.
The security custodian will be the legal owner of the property but will hold the property in trust for the SMSF trustee. This trust is called the security trust. The SMSF trustee will have a right to become the legal owner of the property by repaying the SMSF loan in full.
Before your loan can be approved and finalised, you must obtain advice from your financial and legal advisers before taking out an SMSF home loan.
We recommend you seek independent financial advice before borrowing money to invest via your SMSF. Ocean Home Loans mortgage brokers actively seek to work in conjunction with your professional advisers, such as your accountant, financial adviser or lawyer, to help you obtain the ideal structure for your investment needs.
How much can your SMSF borrow?
As a general rule of thumb, a bank will lend up to 80% of a residential property’s value and ask for a guarantee from the trustees; a guarantee may not be required for SMSF home loans below 60% of the property’s value. The benchmarks for commercial property are 70% and 50%, respectively. The bank will assess property quality, credit history and rental income in assessing the need for a guarantee.
Note: Lending policies for SMSFs vary between lenders, particularly in how they assess your ability to repay the loan. SMSF mortgages are available as Full Doc or Lo Doc loans.
Why use a mortgage broker?
There is a vast difference in the offerings from the major banks, 2nd tier banks and non-banks for super fund mortgages for residential and commercial investment loans.
Ocean Home Loans mortgage brokers are experts in SMSF home loans for residential and commercial investment loans. Please call us on 07 5593 1420 and we can discuss your options with you or enquire online, and we will contact you as soon as possible to discuss your options.
When is an SMSF allowed to borrow money?
There are laws restricting the use of SMSFs to borrow money and restricting the recourse of the lender if the trust cannot meet its repayment obligations.
A basic outline of the rules a trust must follow to borrow money is as follows:
- The borrowing must be used to finance or refinance the acquisition of a “single acquirable asset” (the residential or commercial investment property) that the SMSF trustee is not otherwise prohibited from acquiring by the SIS Act or any other law. The borrowing may also be used to meet expenses incurred in connection with the borrowing or acquisition (such as conveyancing fees, stamp duty, brokerage or loan establishment costs) or in maintaining or repairing the asset. However, the borrowing cannot be used to meet expenses incurred in improving the asset.
- The asset is held in trust (the security trust), also known as a bare trust, so the SMSF trustee acquires a beneficial interest in the asset.
- The SMSF trustee has a right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest in the asset.
- The rights of the lender or any other person against the SMSF trustee in connection with any default on the borrowing are limited to rights relating to the asset. This protects the other assets of the SMSF. This limitation applies to any rights of recovery that the security custodian and any director of the SMSF trustee may have against the SMSF due to their guarantees and the mortgage.
- If, under the arrangement, the SMSF trustee has a right relating to the asset (other than the right to acquire legal ownership), the rights of the lender or any other person against the SMSF trustee in connection with or as a result of the SMSF trustee’s exercise of their rights are limited to rights relating to the asset.
- The asset is not subject to any charge, including a mortgage, lien or other encumbrance.
- Each borrowing arrangement can only be for a “single acquirable asset”. In the case of strata titles or subdivisions, each title is considered a separate asset.
Are there any restrictions?
There are restrictions on SMSF Home Loans, which prevent some transactions from taking place. For example:
- Construction loans are not available. However, the SMSF can pay for renovations out of its own funds but cannot use the borrowed additional funds for this purpose.
- Buying a property in your SMSF that you intend to live in (owner-occupied business premises are acceptable).
- Selling a residential property to your SMSF that you or a related party owns (commercial property is acceptable).
You may also wish to speak to your accountant or financial adviser to determine if your intended transaction complies with lender rules and government regulations.
Do all banks have SMSF Home Loans?
Not all of the major banks have chosen to lend to super funds, placing their own customers in a position of having to source an SMSF Home Loan from another bank or lender or having to seek out a specialist SMSF investment mortgage broker, such as Ocean Home Loans.
We know which lenders can help with your residential or commercial property investment. Please call us on 07 5593 1420 to find out which bank or lender would be most suitable for your situation, or enquire online, and we will contact you as soon as possible to discuss your options.
How will the loan be structured?
The SMSF Home Loan is made out to the trustee of the SMSF in its capacity as a trustee, with the security custodian as the mortgagor.
The lender has limited recourse, and if the loan is defaulted, they have no ability to claim the other assets held by the trust.
Some lenders require guarantees from the members of the superannuation fund, however, the guarantee is modified to ensure guarantors do not have recourse to the SMSF trustee if there is a default on payment under the guarantee.
Other lenders do not require personal guarantees from the superannuation fund members.
So, what are the benefits of property investing via SMSF?
- Commercial property owned by you can be sold to the SMSF at market rates
- Assets in the SMSF are secure as the lender only has recourse on the investment property, plus any additional security provided by the guarantor
- The SMSF loan is paid off by using super contributions and rental income
- The SMSF is only taxed at the net income after loan interest and expenses are deducted against the rental income
- The SMSF is only taxed at a rate of 15% compared to marginal rates if the property was purchased in a personal capacity
- Capital gains will only be taxed at a rate of between 0% – 15%.
What else should I consider?
- The SMSF needs to be established before the security trust (bare trust) and corporate trustee are established.
- The security trust (bare trust) and corporate trustee are mere title holders of the property, and all transactions will occur within the SMSF.
- The trust deed provided allows for borrowing
- The investment strategy of the SMSF should allow for property investment
- The SMSF will require sufficient cash flow to service the loan. This can come from rental incomes, investment earnings and member contributions
- All transactions incurred must be at arm’s length and at market rates
- Do not consider buying a holiday property in your SMSF and then using it
Applying for an SMSF Mortgage
We recommend applying for your SMSF mortgage at least two weeks before you begin looking for a property. As opposed to “normal” lending time frames, it can take the banks several weeks to assess your loan application’s capacity to service and the vetting of the SMSF trust deed by the bank solicitors; by doing so, we can have your SMSF home loan conditionally approved subject only to the satisfactory valuation of the security property, once sourced.
There are not many mortgage brokers or bank managers that understand Self Managed Super Funds (SMSF), and even fewer are experts in SMSF mortgage lending.
Ocean Home Loans mortgage brokers are experts in SMSF home loans for residential and commercial investment loans. Please call us on 07 5593 1420, and we can discuss your options with you, or enquire online, and we will contact you as soon as possible to discuss your options.
Warning: The content of this page provides General Advice about SMSF lending processes, SMSF home loans, lender requirements and our service. It does not take into consideration your specific personal or financial circumstances, needs and objectives and is not a specific recommendation. We recommend you seek independent financial advice before borrowing money to invest via your SMSF.
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