1 SMSF take longer than you think
SMSF loans are complicated because they involve a number of Trusts and associated parties; Borrowers, Guarantors, Beneficiaries, Directors, Trustees are all part of the application. Each of these parties has rights under the law and each of them is protected by carefully worded Trust Documents. Lenders are wary of being in a position where someone could be at risk of losing their superannuation so they will make sure that all parties to the transaction, themselves included, are adequately covered. In particular they want assurance that you understand your responsibilities. That usually means you are required to get independent Legal and Financial Advice. The Lender will also verify that your SMSF Trust and Bare Trust conform to the Legislation by having their Legal team go over it and they may ask for corrections or amendments to be done. Of course, processing all of this documentation takes time so be prepared to move quickly if you have to.
2 Interest rates are not important
SMSF loans have a higher interest rate than a traditional Home Loan and they are not included in the Professional packages offered by many Lenders. Most Lenders have similar rates for SMSF loans. The good news is that the interest rate is not as important as the features you choose as part of the loan. These features should complement the most efficient use of your remaining Super balance. Directing these funds into an Offset account connected to your SMSF loan can prove to be an advantage by reducing the interest that you pay while still being able to use the money if you want to. Given that borrowing in SMSF structures is limited to Acquisition only it’s clear that a SMSF loan is more of a set and forget proposition. Rather than thinking in terms of reducing the debt, perhaps think more of increasing your Offset balance. The more money you have in your Offset account, the less interest you will pay.
3 Advertised LVRs are misleading
Most of us tend to think in terms of standard LVRs (Loan to Valuation Ratio) when we think of borrowing. SMSFs are different though. The most you can get will be 80% LVR but the majority of Lenders will limit you to 70%. However, as the method used to determine your borrowing capacity is built around your Super contributions it’s possible you may not get 80% LVR anyway. In fact, most borrowing tends to sit around the 50% to 60% LVR level. It’s important to understand that it’s your Super Contributions that are the primary source of repayment and they only comprise 9.5% of your Gross Income. From a borrowing perspective that is the limiting factor. More than any other loans, SMSF LVR’s are driven by income. While the low numbers may seem harsh, the good news is that the property may be self-sufficient faster than you thought.