Whether your superannuation is in its early stages or is building up to a substantial retirement pool, managing the decisions of how your superannuation should be spent through a Self-Managed Super Fund (SMSF) could provide you with more rewarding investment options.
In 2007, changes to superannuation laws allowed an SMSF to borrow money in order to purchase an investment asset, as long as a strict set of rules are followed. These changes have allowed people to invest their superannuation into assets including property, both residential and commercial, as well as shares and managed funds.
It means people will now have access to Limited Recourse Borrowing Arrangements to buy property using part of their superannuation cash as a deposit.
Setting up an SMSF
Before setting up an SMSF you need to make sure it is right for you and your future purposes. You should always seek professional advice from a financial planner or accountant prior to making the decision.
What is Limited Recourse Borrowing?
A limited recourse borrowing arrangement requires an SMSF trustee to take out a loan from a third party lender. The trustee then uses those funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate (bare) trust.
Any investment returns earned from the asset go to the SMSF trustee.
In order to ensure that borrowing through your SMSF does not place other retirement investments held in your SMSF at risk, the asset that is purchased under a borrowing arrangement must be held in a specific holding trust until the loan is repaid. If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.
What are the rules governing Limited Recourse Borrowing arrangements?
- Super fund assets are better protected in the event of a default on a loan
- The asset within the limited recourse arrangement can only be replaced by the different asset in very specific circumstances within the superannuation law
- Limited Recourse Borrowing arrangements cannot be used to borrow funds to improve an asset, however they may use cash to make improvements
- The borrowing is only permitted over a single asset or a collection of identical assets with the same market value
- Recourse by the borrower (or any other person against the superannuation fund trustee) for default is limited to rights relating to the acquirable asset.
Interest rates and lending criteria for Limited Recourse Borrowing
Borrowing for an SMSF is a little more complicated than a standard home loan. Only some lenders offer Limited Recourse Borrowing and the lending criteria continues to change, so it’s always wise to speak to a mortgage broker.
SMSF lending approval can also take more time to obtain due to the more complicated structure, valuation process and legal reviews that are required.
Some key features of Limited Recourse Borrowing;
- SMSF residential investment property variable interest rates start from 5.64% and may attract a loading by the banks on interest only repayments
- LVR is generally up to 80% for residential properties and up to 70% for commercial properties
- Repayment terms will allow for principal & interest or a mix of interest only and principal & interest repayments
- An offset facility for the SMSF is also available with one lender
- Some SMSF lenders have recently introduced a minimum cash buffer requirement for limited recourse borrowing. This is to ensure that the fund has sufficient cash reserves to cover repayments and any problems or maintenance issues that may arise (also for non-rental periods in between tenancies) with the property as well as for ongoing accounting and compliance / audit costs.
Investing and borrowing for SMSFs can be confusing so it is always best to seek professional financial advice before committing to anything, particularly limited recourse borrowing arrangements.
Tips for SMSF property loans
- Before you start looking at properties you need to make sure you SMSF if fully set up and all your contributions have been transferred into the SMSF
- Always get pre-approval from the lender prior to going house shopping
- Have a financial strategy in place and know exactly what type of property your SMSF will benefit from
- Refinancing an SMSF loan is possible, but there are restrictions and additional costs so speak to Mint Equity to find out what options you have.
Benefits of SMSF loans to business owners
Whilst you can’t personally occupy residential properties purchased in the SMSF, your business can lease a commercial property from your SMSF. However, the lender will do a legal review to make sure the property is still a good investment.
How Mint Equity can help
Regardless of your starting point, Mint Equity will guide you through the process of arranging finance for the purchase of a property in your SMSF.
We’ll work with you to identify the maximum loan amount you can secure so you can easily identify key properties that fit your strategy.
We will outline your requirements and source a SMSF loan for your residential or commercial property. We will liaise with the lender to ensure you get the best interest rate, terms and pre-approved finance.
Mint Equity will take the complexity out of the process and guide you from pre-approval through to settlement.
Our services are free of charge as we are remunerated by the lender you choose once the loan reaches settlement.
Why choose Mint Equity for SMSF loans?
Mint Equity is an experienced mortgage broker with specialist knowledge of SMSF loans. The nature of SMSF loans is more complicated than a standard home loan, so it’s essential that investors seek guidance from a mortgage broker who knows the options, industry, credit criteria and requirements to ensure you have smooth process.
There is only a small selection of lenders who offer Limited Recourse Borrowing for SMSF property purchases, some are more litigious and slower than others. To speed up the process we can provide inside information that will help you get quick pre-approval and settlement so you don’t lose the property to another buyer.
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Frequently Asked Questions about SMSF loans
How much can my SMSF borrow?
Generally, you can borrow up to 80% for residential properties and up to 70% for commercial properties. Assessment is based on the personal contributions into the fund and potential rent from the property to cover the repayments. Additional personal contributions can be used but your personal position will also need to be assessed by the lender if this is required as a top up.
How long does it take to get an SMSF loan?
If your SMSF if already set up and you provide all the required documents, we can submit your loan application within a few days. From there the selected lender will need some time to review the trust deed, arrange a valuation of the property and perform a legal review. We usually allow 2-3 weeks for this process to be completed. Once this is complete and everything checks out, you’ll be provided with pre-approval. Settlement can take a little longer than a normal home loan so it’s wise to negotiate an extended cooling off and settlement period.
I want to buy a property in my SMSF, what should I tell the real estate agent?
Because the process is a little more complex and longer than a standard home purchase, you should let the real estate agent know that the purchase will be made by your SMSF and that you may require a longer settlement period.
I don’t have an SMSF yet, can I still buy a property while it’s being set up?
Setting up an SMSF is a detailed and litigious process. Whilst the set up time has improved over the last few years, you’ll still need to transfer your contributions from your retail fund into the SMSF and this could take time, particularly if you have used multiple funds. It is safer to wait until your SMSF is set up before looking at property.
What other services does Mint Equity offer?
Mint Equity covers the full spectrum of property and business finance.
- residential home loans
- commercial loans
- investment property loans
- SMSF loans
- construction and development loans
- business loans
How can I make an appointment?
We can arrange appointments 7 days a week at a time that suits you and at your preferred location. You can call us on 0402883450.
What locations does Mint Equity service?
Our operations are based in Sydney and the Central Coast, however were able to service all parts of Australia and for clients living overseas.
What lenders does Mint Equity have access to?
We have access to over 40 lenders including the big 4 and 2nd tier lenders which provides us with 100’s of products to suit the needs of our clients.