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.
Setting Up Your Finance
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.
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
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.
This is the process of finding a property that meets your preferred criteria
Within a week
Here you establish if your super fund situation allows for you to borrow enough to safely secure the purchase
1 - 2 hours reading
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.
Here your plan is discussed and authority is granted to begin the set-up/review of your SMSF structure.
Here you are setting up your SMSF, TFN and ABN, writing your investment strategy, setting up bank accounts and finally the bare trust.
After insurance is reviewed to ensure any covers lost from rolling over are protected, the rollovers from old funds can be processed.
1 - 2 hours
2-3 months from
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.
Start your Own
Self Managed Super Fund!