This is a subject that causes a lot of confusion for people looking to borrow under a SMSF strategy. The assumption that Smsf loans are assessed the same way as other Mortgage loans leads many people to have higher expectations than perhaps are achievable. This article should help you to understand the smsf essentials everybody should know.
Before any smsf loan assessment takes place you will have to tick the boxes for these basic loan conditions.
– must be for acquisition only
– Established or Off The Plan ( must be single contract)
– Acceptable security type and postcode
If these are all acceptable then you can look at the actual requirements per lender. We’ve listed some of the basic ones to consider.
Liquid asset test – this test varies greatly between lenders. Basically, the lenders want you to retain a percentage of your SMSF balance in the fund to ensure there are adequate reserves and these are the four most common methods they use;
- Retain the equivalent of 10% of the total loan amount in the fund
- Retain 20% of the Super Fund balance prior to any deposit being paid
- Retain 10% of the total assets held by the fund after the contributions to the purchase is deducted plus the purchase price
- Retain 10% of the fund balance prior to the purchase
This requirement for retaining liquid assets will impact on any finance you need. You may be forgiven for thinking it’s an onerous condition but to be honest, any SMSF purchasing a property should have money held in reserve. The principle is sound, only the lenders execution is lacking.
Minimum balances – This is designed to make sure the fund and borrower have some maturity in them because as you can imagine, it takes time to accumulate that amount of Super. For some Lenders, you will have to have over $150,000 and even $200,000 for others for the loan to be assessed. We have also seen instances recently of a Lender insisting on the minimum $200,000 in the fund even after a deposit has been paid for a property purchase.
– PAYG By law, contributions from your employer should be 9.5% of your annual salary.
– Self-employed The Lender will use the contributions you make to assess your serviceability. If there haven’t been regular contributions to your super fund all is not lost.
Some lenders will consider allowing you to borrow using only the rent as income. Naturally, from what we have looked at you will already have guessed that the loan will be much smaller.
Potential rent from the investment purchase will be accepted, but at a reduced 80% value in most cases.
Investment earnings – most of the time, there will be super balance left over after the purchase. Some lenders will consider this balance earning a set percentage of income, say 4% for example, which can be used towards the income position.
Now that we have gone over the major conditions, let’s have a look at how a typical smsf lending assessment scenario would play out.
PAYG Income $100,000 p/a X 9.5% = $9,500 p/a Super Guaranteed Contributions (SGC)
Potential rent $16,000 p/a
Note: For our purposes we will assume the SGC and rent will meet the Lenders serviceability test.
Industry Superannuation Fund Account Balance $250,000
Balance remaining $95,000 after own funds contribution ($250,000 – $155,000)
Using our example let’s see how the various Tests and minimum requirements work out.
Liquid Asset Test (all variations from above)
So you can see that for this scenario we have ticks for all the major considerations and there is a healthy surplus of $95,000 available that most lenders would be pleased with. The Lender will also send your Trust Deeds to its legal representative for verification that the SMSF can borrow. Sometimes during this check the Lender my request a small amendment to the Deed to meet their interpretation of what the Deed should say.
Don’t forget, loan assessment for smsf lending is a multi-step process and this guide cannot do anything more than give you the basics of what Lenders are looking at currently.
It goes without saying that we recommend anybody contemplating a SMSF to seek out smsf advice from a professional especially if you anticipate a need for smsf finance at some point. Our SMSF advisers are available to help explain what smsf benefits you can expect while our SMSF accredited Mortgage Advisors can discuss your finance situation in greater detail.