Who borrows the money?
The Trustee for the Self Managed super fund applies for the loan and enters into the loan Contract while the Trustee for the Bare Trust.
The Trustee for the Self Managed super fund applies for the loan and enters into the loan Contract while the Trustee for the Bare Trust, also known as the Security Custodian, provides a Guarantee to the Bank. The Guarantee is required because ownership of the security is not in the name of the SMSF and the Bank needs to link the two together to protect its Mortgagee status.
Are there any restrictions to borrowing money?
A SMSF can borrow money for acquisition purposes only. In simple terms that means a purchase only. Once the loan has been made no further borrowing on that security property by the SMSF is allowed.
A SMSF can borrow money for acquisition purposes only. In simple terms that means a purchase only. Once the loan has been made no further borrowing on that security property by the SMSF is allowed. So, if the property needs repairs or renovations the Self Managed Super Fund cannot borrow money for that purpose. It can use it’s own money to do the work of course, but borrowings are not permitted. The only exception to further borrowing is a refinance of an existing SMSF loan but no equity release is possible.
Are these loans available from all lenders?
Each Lenders determines their own place in the market based on the type of customer they want to attract.
Each Lenders determines their own place in the market based on the type of customer they want to attract. They manipulate their Pricing and Credit policies so they appeal to those customers. Self Managed Super Fund loans in themselves are a complex Lending product to offer to the public and not every Lender has the appetite to become involved in the sector. Given that, there are Lenders experienced in SMSF lending who are happy to have this type of loan on their books. Even so, each lender will still have policies designed to minimise risk to their business. For example they may stipulate what types of properties they will accept as security, or the LVR that will apply. The Credit policies for SMSF loans are quite complex and it’s highly recommended you talk to an experienced SMSF Mortgage Professional when considering borrowing under this structure.
How are these loans different from other Mortgage Loans?
Loans to Self Managed Super Funds are known as Limited Recourse Borrowing Arrangements or LRBA. The loan for property is of a non-recourse nature.
Loans to Self Managed Super Funds are known as Limited Recourse Borrowing Arrangements or LRBA. The loan for property is of a non-recourse nature, meaning that the Lender does not have recourse to other assets within the SMSF, other than the nominated security. It’s important to understand that the Lender will always ask for a Guarantee from the Director and Secretary of the Corporate Trustee for the Super Fund which is normal lending practice. In the case of individual Trustees, Guarantees will still be required. You will also be required to obtain Legal advice on the consequences of entering into such an arrangement, but again, this is standard lending practice. Some Lenders will also insist on Financial advice as well.
How are Super Loans assessed?
Unlike loans outside of Superannuation, SMSF loans only use the contributions to the SMSF as the income along with any rent from the Proposed property purchase.
Unlike loans outside of Superannuation, SMSF loans only use the contributions to the SMSF as the income along with any rent from the Proposed property purchase. Given how sensitive we all are to Superannuation its no wonder that the Banks are quite strict with the policies surrounding SMSF loans. Being able to service the debt is a high priority for any Lender so naturally they are more strict with SMSF lending than other types of finance. As a rule of thiumb, you can count on getting an LVR of around 60% because of these restrictions even though Banks advertise up to 80%. Mortgage Insurance is not available so a strong balance in your SMSF is essential. There are also Asset tests, Liquidity tests and minimum balance requirements to navigate through before any loan amount or lender can be confirmed.
This complexity means a Mortgage Professional is the ideal person to guide you through the options available to you for borrowing. More than any other type of finance, SMSF loans demand an expert opinion.
Buying property in SMSF
How are Super Loans assessed?
Who signs the contract of sale?
Ownership of the property rests with the bare trustee who becomes the legal owner of the property. The Trustee for the Bare Trust is the entity that signs the Contract of Sale for a property purchase where SMSF borrowing is required.
Ownership of the property rests with the bare trustee who becomes the legal owner of the property. The Trustee for the Bare Trust is the entity that signs the Contract of Sale for a property purchase where SMSF borrowing is required. Each state has somewhat different rules in relation to completion of a property contract; therefore we recommend that when a nominated purchase is made that you seek legal advice from someone qualified in property law in the state where the proposed purchase is located, to confirm the correct naming convention.
Tip: To ensure your purchase proceeds efficiently and that you are confident you have the ability to complete the purchase, Investors Direct manage the process for you where your property purchase is arranged through us.
Summarising the process
How are Super Loans assessed?
The steps involved in purchasing a residential property in a SMSF can be summarised as follows:
|IDFP KEY STAGES||YOUR INVESTMENT OF TIME||TIME BETWEEN STAGES||OUTCOME|
|1-2 hours||On interest in SMSF Property||Learning what a Self Managed Super Fund is, How it can be used and deciding if this is a valid investment for your circumstances.|
|Indefinite||Indefinite||Finding a property that meets your preferred criteria|
Finance Eligibility Analysis
|1 hour||Within a week of Intention of Purchase||Establish if your super fund situation allows for you to borrow enough to safely secure the purchase|
Financial Plan Production
|1 - 2 hours reading||1 week||A Financial Planner arranges a written policy framework for your superannuation to invest into your chosen property.|
Authority to proceed on structure
|1 hour||1 week||Your Plan is discussed and authority is granted to begin the set-up/review of your SMSF structure.|
|1-3 hours||1-2 months||Setting up your SMSF, TFN and ABN, writing your investment strategy, setting up bank accounts and finally the bare trust.|
|1 hour||1 month||Insurance is reviewed and the rollovers from old funds can be processed.|
Finance is then reviewed
|1 - 2 hours||2-3 months from settlement||Finance application is prepared. On approval loan documents are sent. A Solicitor will be required for advice. Settlement is booked when documents received by the Lender.|