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SMSF Finance, signing Contracts, and The Process

Setting Up Your Finance

The loan is taken out by the SMSF. The assessment of finance is always around the details of the fund itself, including its cash flows and its assets. This is not a personal loan assessment as it is traditionally focused on seeing if the fund, a separate legal entity from you personally, can afford to buy a suitable property. Money is lent on the security for the borrowings offered over the property structure (bare trust) and not assets held in the SMSF name.

Borrowings are only allowed for the purchase of a property (house and land together) and to cover any costs associated with the purchase. Be careful not to borrow for improvement or development of assets – this can lead to breach of the regulations that manage superannuation.

The lenders available for SMSF loan purposes vary and it is always best to deal with a reputable lender who has done significant business in the area. It is always best to seek the help of a suitably qualified mortgage broker who can assist you to get the best available terms for the present market. One possibility, where finance becomes a burden/problem, is to borrow funds to a super on commercial terms oneself. Legal advice is recommended to ensure that this can be done without breaching the laws around SMSF lending.

The loan for property is of a non-recourse nature, meaning that the loan to the fund does not have a recourse to the assets of the fund outside of the security offered for the loan. This means that the lender does not have the ability to tackle other parts of the SMSF assets in the event that the loan is not repaid. The key message here being that lenders may ask for a guarantee over personal assets - this is considered normal.

As the fund is providing its financials to the lender for assessment, the lender will want information for the assessment such as:

  • Annual statements for the fund (or current fund(s) if no SMSF presently, which prove contributions received by superannuation funds on the members behalf for the last two years);
  • Documents for SMSF, Bare Trust and borrowing entity (once set up);
  • Rental appraisal for the proposed purchase;
  • Copy of contracts for the purchase;
  • Identification; and
  • 3 payslips for those who are employees, or 2 years tax returns for self-employed.

Signing Contracts

Who signs the contract of sale

It is the bare trustee who becomes the legal owner of the property on the title and it is using this entity that one signs for the contract of purchase for a property where SMSF Borrowing is concerned. 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 counsel qualified in property law in the state where the proposed purchase is located in relation to the naming convention used for any purchase.

Tip: To ensure your purchase process is efficient and that you can maintain confidence that you have the ability to complete your purchase, Investors Direct track the process for you where your property purchase is arranged through us.

Summarising the process

The steps involved in purchasing a residential property in a SMSF are summarised as follows:

INVESTORS DIRECT FINANCIAL PLANNING KEY STAGES

YOUR INVESTMENT OF TIME

TIME BETWEEN STAGES

OUTCOME/ DELIVERABLE

Stage 1
Education

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.

Stage 2
Property Hunting

Indefinite

Indefinite

This is the process of finding a property that meets your preferred criteria

Stage 3
Finance Eligibility
Analysis

1 hour

Within a week
of Intention of Purchase

Here you establish if your super fund situation allows for you to borrow enough to safely secure the purchase

Stage 4
Financial Plan
Production

1 - 2 hours reading

1 week

The information for the purchase is given to a financial planner to arrange a written policy framework for your superannuation to invest into your chosen property.

Stage 5
Authority to proceed on
structure

1 hour

1 week

Here your plan is discussed and authority is granted to begin the set-up/review of your SMSF structure.

Stage 6
Structure completion

1-3 hours

1-2 months

Here you are setting up your SMSF, TFN and ABN, writing your investment strategy, setting up bank accounts and finally the bare trust.

Stage 7
Rollovers

1 hour

1 month

After insurance is reviewed to ensure any covers lost from rolling over are protected, the rollovers from old funds can be processed.

Stage 8
Finance is then reviewed

1 - 2 hours

2-3 months from
settlement

Finance is prepared for settlement. On approval settlement is then booked

Upon completion of the above, several further steps remain: insurances for the SMSF property are completed and the lease agreements arranged. From there the ongoing maintenance of the SMSF will be placed in the hands of a suitably qualified accountant. We note that the above list is not exhaustive and we recommend seeking advice on each of the above steps to ensure full understanding of the impacts of each before any further action is taken.

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Investors Direct Financial Group

Investors Direct Financial Group (IDFG) was established in 2001.
Our mission is to help our clients achieve and maintain their financial freedom.

Members of the IDFG Group include:
  • Nanmon Financial Services Pty Ltd, trading as Investors Direct Financial Group (ABN: 52 097 697 820 ; ACL: 402950)
  • ID Property Advisory Pty Ltd (ABN: 69 141 716 412 ; Real Estate Licence: 071792L)
  • Investors Direct Financial Planning Pty Ltd(ABN: 50 141 139 228 ; AFSL: 385827)
  • Investors Direct Property Management Pty Ltd (ABN: 59 153 184 859 ; Real Estate Licence:073458L)
  • 8 Star Homes Pty Ltd (ABN: 83 135 066 876)
  • Investors Direct Financial Services Pty Ltd ACN 608 410 591
ID Super – Super & Pension ID Super Investment & SMSF IDFS Brochure