SMSF Loans

What is a Self Managed Superannuation Fund (SMSF)?

A SMSF is a special type of trust that people can set up to manage their own superannuation. Like a normal super fund, your employer contributions still get paid into the fund and you can make additional contributions as you see fit. Unlike a normal super fund, you (or the trustee) have direct control over the assets that your superannuation is invested in.

Keep in mind that there are special rules governing how super funds must be run, and you cannot use a SMSF to gain early and improper access to superannuation. In 2007 the laws were changed to allow SMSFs to borrow as long as certain requirements were met.

Why don’t most banks lend to super funds?

The majority of lenders do not lend to super funds to buy investment properties because of the smaller size of the market, the complexity of trust loans and because the lender’s recourse is limited to the asset itself.

What does this mean? To a lender it is more work, for a higher risk loan with a lower profit! However not every lender sees it the same way, some lenders will even allow discounted residential loans to be used by super funds.

How much can you borrow?

Standard SMSF Investment Loans: 80% of the property value. Note that most lenders restrict your loan to 75% or 72% of the property value.

Low doc (no income evidence): Ability to repay the loan must always be proven, low doc loans are unavailable.

Commercial property: Up to 70% of the property value for non-specialised securities.

Discounts: Most lenders add a margin to their normal residential loan rates for SMSFs, however these margins vary significantly.

Note: Lending policies for SMSFs vary between lenders, particularly in the way they assess your ability to repay the loan. Please contact us to find out which lender is most suitable for your mortgage.

You MUST use a mortgage broker!

The residential investment and commercial loans offered by the major banks are not as competitive as those offered by the smaller banks and building societies. For a standard home loan there is only a small difference between different lenders, for a SMSF loan there a big differences in fees and interest rates.

Please call us on 1300 889 743 or enquire online and one of our Self Managed Super Fund expert mortgage brokers will discuss your options with you.

When is a SMSF allowed to borrow money?

There are laws restricting the use of SMSFs to borrow money, and restricting the recourse of the lender in the event that the trust was unable to meet its repayment obligations. A basic outline of the rules a trust must follow to be able to borrow money are as follows:

• The asset is an asset the SMSF could otherwise legally acquire (if it had the funds).
• The asset is held on trust for the SMSF using a Security Trust (known as a Security Custodian).
• The SMSF acquires a beneficial interest in the asset from the outset.
• The SMSF has the right to acquire legal title on making one or more payments.

There are restrictions on SMSF loans which prevent some transactions from taking place. For example:

• Construction loans may not be available. However the SMSF can pay for renovations out of its own funds.
• Refinances of existing SMSF loans may not be available (One of our lenders can now offer refinances).
• Buying a property in your SMSF that you intend to live in (owner occupied business premises are acceptable).
• Selling a residential property that you or a related party owns to your SMSF (commercial property is acceptable).

Please contact our mortgage brokers or speak to your accountant or financial planner to confirm if your intended transaction complies with the lender rules & government regulations.

Which banks have loans for SMSF trusts?

The major banks have not all decided to lend to super funds, leaving many bank customers unable to obtain investment loans for their SMSF without seeking out a specialist broker. We know which lenders can help with your residential or commercial property investment, please contact us to find out how much you can borrow.

In particular, there are large differences in pricing between the major lenders. You are likely to pay a significantly higher rate if you only talk to your current bank!

How will the banks assess my loan?

The main hurdle encountered with most mortgage applications is in proving that there is sufficient income in the trust to support the loan. Typically, the banks will look at the current income of the trust based on it’s previous two years tax returns and then will assess if that income plus the proposed rent income will be sufficient to service the debt.

For new trusts some lenders will look at the current income of the trust beneficiaries, the previous super contributions they have been making and their new proposed super contributions. Their loan can be assessed based on their proposed super contributions if they are within the maximum amounts allowed by the ATO and if they can afford these contributions without hardship.

Lenders know the maximum amounts that you are allowed to make as concessional and non-concessional contributions, and will decline loan applications that require contributions in excess of these amounts to prove your SMSF’s ability to repay the debt.

If you are close to your retirement age then the lender may not accept your super contributions in their assessment. If you no longer have a personal income then of course your super contributions will cease. In these cases the lender may shorten the loan term or reduce the amount of the loan so that the rent income can cover the repayments.

Be careful if you are relying on income from shares or interest from the current assets of your trust. If you are selling these assets to provide the deposit to purchase the property then that income cannot be included in the lenders assessment.

Compared to home loans & commercial loans, this type of lending is relatively new. Each bank has come up with their own way of assessing SMSF applications, so if your bank can’t help you then please contact us and our mortgage brokers will help you to find a solution.

How will the loan be structured?

The loan is made out to the trustee of the SMSF in its capacity as trustee with the security custodian as mortgagor. The lender has limited recourse in that if the loan is in default they have no ability to claim the other assets held by the trust.

Some lenders require guarantees from the members of the superannuation fund, however the guarantee is modified to ensure guarantors do not have the recourse to the super trustee in the event of default / payment under the guarantee. Other lenders do not require personal guarantees from the members of the superannuation fund.

How long does it take to get an approval?

Borrowing in a SMSF is far more complicated than applying for a normal home loan. We find that many of our customers take around a week to collate the documents required to apply for the loan, and then it often takes banks another week to assess & accept the pre-approval application. We recommend that you apply for the loan at least two weeks before you begin looking for a property.

This process can be expedited if required, however it is always best to allow additional time to avoid disappointment.

Can my SMSF buy a property from my personal portfolio?

Your SMSF can buy a commercial property that you already own, however your fund cannot buy a residential property that is owned by you or a related party. We recommend that you discuss any potential tax implications of transferring a property from your name into your SMSF with an accountant that specialises in SMSFs.

Apply for a SMSF loan

There are few mortgage brokers or bank managers that understand self managed super funds and even fewer that are experts in lending to them. By using our services you can be sure to get the best advice for your SMSF trust loan. Please enquire online to discuss your loan with one of our mortgage brokers.