Mortgage lending has evolved over the last few years due to a number of significant changes. The most notable would have to be Regulator interference in the market, specifically targeting investors in an effort to cool the Melbourne and Sydney property markets. Secondly, we have the Banks reaction to these changes and the significant restrictions placed on Investors from both a pricing and credit criteria perspective. On a brighter note though, one aspect of investing that isn’t slowing down is SMSF borrowing which continues to prove popular.
A Self-Managed Superannuation Fund (SMSF) remains a great way to add a property to your portfolio without affecting your take home pay. This is great news for those investors fighting serviceability issues at the moment. However, before you rush out and start looking for another property you should know how these loans are different from other Mortgage Loans.
The first thing to understand is that SMSF loans are specialised finance products so not every Mortgage Broker or Mortgage Company is able to organise one for you. Smsf finance is only available from specific lenders so it’s important to look at who is providing this finance and which one suits your situation. The Terms and Conditions vary considerably between Lenders and getting the right fit between a lender and your specific needs requires considerable skill and training. That’s why we definitely recommend using mortgage brokers registered with professional industry bodies such as the Mortgage and Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA).
Unlike other types of Mortgage lending SMSF are classified as Limited Recourse Borrowing Arrangements (LRBA). This term means that in case of default only the offered security can be sold to recover the debt, the remaining assets of the fund cannot be touched.
The legislation allowing SMSF finance specifically excludes property occupied by the beneficiaries and must be arm’s length from the purchaser. So, no owner occupied properties or properties occupied by relatives can be purchased.
Smsf finance is more expensive than other types of mortgage loans. SMSF loans are subject to more scrutiny that other mortgage loans and that is reflected in the price and fees payable. It’s also interesting that no Professional Packages offering interest rate discounts or waiving of fees are available either, just the opposite from other Mortgage Lending products.
Borrowing capacity is calculated much differently than other mortgage loans so the loan amount you qualify for from a Lender may well surprise you. Others differences include Liquid Asset tests as well as requirements for minimum Super balance to be held by the fund.
Most loans will require smsf advice from a Financial Planner. While it’s possible to organise your own SMSF it’s highly recommended that you consult with a Financial Planner as a SMSF is best organised as part of a strategic plan. Just as important is to seek the help of smsf advisers who have experience in property investing. It’s one thing to know what to do, it’s a very different thing to have gone through it yourself.
A SMSF requires specific Trusts to be set up so that each of the different entities comply with the appropriate legislation. Trusts of this nature have complex legal issues which is why the Lender will insist you obtain independent legal advice. For the same reason, the Lender will also insist on you having independent financial advice.
Clearly both of these requirements are to cover off the lender from any claim that the borrower didn’t understand the finance structure in the case of hardship but it is obvious that it’s in your best interests to fully understand your legal and financial position when you enter into a SMSF arrangement.
Smsf finance can only be used for the purchase or acquisition of a property. No other reasons are allowed. That effectively rules out equity release and raises an interesting question. What finance strategy do you employ if further borrowing is not an option?
Do you opt for P & I instead of I/O and utilise a Fixed Rate to lock in repayments or perhaps opt for an Offset account? These are considerations that aren’t usually looked at by a property investor.
One factor that often gets overlooked is the fact that Lender quoted LVR’s are not necessarily achievable because SMSF finance is very much driven by Super contributions and potential rent. Couple this with strict borrowing capacity calculators and it’s unlikely that maximum borrowing will reach higher LVR levels. Mortgage loans outside of Super are more flexible insofar as the acceptable income is concerned.
Some of the Smsf benefits in having property inside the fund include Capital Gains tax advantages not available to outside super properties. These tax advantages are a compelling reason for people to purchase properties inside their SMSF although they vary depending on whether your fund is in accumulation phase or pension phase.
Naturally, given the way a SMSF integrates into your overall financial position, we have only touched on a small sample of the differences between a SMSF loan and other Mortgage loans. To see how SMSF finance fits your situation we invite you to discuss your needs with one of our Mortgage Professionals today.