Self-managed superannuation funds (SMSFs) are the closest thing to a tax haven that we have in Australia.
However, borrowing to invest in property through your SMSF is very complicated.
For example, banks have SMSF loan liquidity requirements where they need to see a certain amount of cash in your super after you’ve settled your mortgage.
How much cash do you need in your SMSF?
SMSF loan liqudity requirements are calculated as the percentage of the property value, not the loan amount.
Generally speaking, lenders want you to keep between 10% and 20% of the property value in cash within your SMSF account.
For example, if you’re buying a property worth $500,000, the bank may require you to keep at least $50,000 cash and other assets in your super.
However, you also have to consider the other costs of purchasing a property, including stamp duty and conveyancers fees. Typically, this amounts to around 3-5% of the property value.
So, in reality, you’d need around 30% of the purchase price to cover the SMSF loan liquidity requirements, in addition to your deposit.
Bear in mind that lending policies for SMSFs vary between lenders, particularly in the way they calculate their liquidity requirement.
Please call us on 1300 889 743 or fill in our free assessment form to speak to a mortgage broker to find out how you can qualify for a SMSF loan.
What do banks look for when assessing your SMSF loan application?
When assessing your loan application, the banks look at the contribution from your job.
They also consider your gearing level, which means how much you’re borrowing against the value of the property.
Then they take into account the size of your deposit. As a general rule, you need to come up with at least 30% deposit. Although some of the lenders in our panel accept 20% deposit.
The lenders also look at the rental yield you’re getting on the property. The higher the yield, the better.
How much can I borrow?
Our brokers can help you borrow:
- Standard SMSF Investment Loans: Up to 80% of the property value. However, please note that most lenders will restrict your loan up to 75% of the property value.
- Commercial property: Up to 70% of the property value for non-specialised securities.
- Low doc (no income evidence): Read the SMSF low doc loan page for more qualifying criteria.
Lending policies for SMSFs vary between lenders, particularly in the way they assess your ability to repay the loan.
Please call us on 1300 889 743 or fill in our free assessment form to speak to a mortgage broker who specialises in SMSF loans.
Is there a way to dodge the bank’s liquidity requirement?
Yes, there is! Some lenders don’t have SMSF loan liquidity requirements at all.
In other cases, you need to a bit of creativity to get away with it, including:
Lower your borrowing
The lower your Loan to Value Ratio (LVR), the lower the risk for lenders. If you’re borrowing less than 70% of the property value, some lenders may waive this requirement altogether.
That’s because, at this level, the rent covers most of the of the actual mortgage repayments.
Having strong serviceability
If you have a good income, have a stable job and not borrowing a large amount relative to your income, some banks may drop their liquidity requirement.
Having strong cash flow
If you have a strong cash flow by way of high rent relative to your mortgage, then the banks aren’t worried that you’re going to run out of money.
Having a strong back up plan
Are you in a position to sell another asset or make extra SMSF contributions if your fund is short of cash?
We know lenders who may drop their liquidity requirements if you meet their lending criteria. Please call us on 1300 889 743 or fill in our free assessment form to speak to a mortgage broker to find out.
What if I’m close to retirement?
SMSF loan liquidity requirements tend to jump to 20% when you’re over 60. One lender even requires you to have 40%!
What matters most to the bank is how long you will be continuing to work and how you intend to keep making mortgage repayments.
This forms part of providing a solid exit strategy that you’ve discussed with a financial adviser.
Why do banks have a liquidity requirement?
Because SMSF is akin to a self-servicing entity, not necessarily reliant on your job’s contribution.
Lenders want to avoid risk so they want to make sure there’s enough money there to meet the mortgage repayments.
Where an SMSF has no funds available then there is a higher risk of missed mortgage repayments. That’s because there is a lack of available cash that you may need for unexpected life events.
This is particularly true for self-employed Australians who do not always earn a recurring level of income.
That’s not to mention the cost of regular maintenance, repairs and the threat of long periods of rental vacancy, something that affects all property investors.
Of course, there’s a commercial element to SMSF loan liquidity requirements as well.
Simply put, they prefer working with “richer” SMSFs because small loan sizes are unprofitable.
How mortgage brokers can help
Borrowing through your SMSF can be a minefield and it’s easy to make mistakes. This is where an experienced mortgage broker can really help you get your loan across the line.
While the number of lenders operating in this space has shrunk significantly, it’s still a growth sector and it’s expected to grow even stronger in the future.
To maximise your chances of getting your SMSF loan approved, our brokers can help by:
- Advising you on how much you can potentially borrow.
- Advising you on how much you need to put into your SMSF to be able to buy a property.
- Guiding you and giving you a game plan to work towards so you can fast track your SMSF loan.
- Discussing with you the kind of properties the bank will lend to and those that they reject. For example, some banks may have lower LVR for off-the-plan and new properties. We know what banks are looking for regarding location and size.
Call us on 1300 889 743 or complete our free assessment form today.