What to look for in an SMSF loan
There is a lot more you need to weigh up when comparing self-managed superannuation fund (SMSF) loans than shopping for a home loan to buy a residential property.
Apart from the interest rate, there can huge differences in price and loan features depending on whether you can get approved through the residential arm of the bank or their commercial or business department.
It’s important that you compare SMSF Loans in the right way because it has to suit the needs of your super fund and your overall financial goals.
How tough is it to get approved?
The most fundamental factor you should take into account is whether you actually qualify for an SMSF loan.
Competition has been heating up in the SMSF space over the past few years and lending policies are getting more flexible.
And the winners in SMSF loans aren’t the major banks and lenders: it’s the smaller credit unions and building societies.
There can huge differences in lending policy so you should consider the following when comparing SMSF loans.
The accumulation phase is the first and largest part of the super life cycle and it starts when you begin work until you’re in your 50s. Some lenders will only consider mortgage applications for borrowers at this stage of their SMSF life cycle and not if you’re nearing retirement.
However, not all lenders are the same and some will still consider your application if you have a solid exit strategy.
You may need to have a minimum net asset position or a certain level of liquidity after you buy the property in order to get approved. This will be based on the property value and your total SMSF income balance.
Some lenders require you to have at least 10-20% of the trust total assets leftover. For one lender, this increases to 40% if you’re close to retirement age.
However, some lenders don’t have a liquidity requirement at all. This can make a huge difference in the amount you can borrow for your SMSF loan.
Using other income
When banks assess your “serviceability” or your capacity to afford the loan, they base this mostly on your SMSF income.
If you need to show more income to get approved, this is where great banks separate themselves from the average players.
There are some lenders that will only use 80% of proposed rental income for the property you want to purchase. Others will use 100% of this income plus voluntary or concessional contributions, and even dividend income from other investments in your SMSF.
Some lenders can even use the income of members or beneficiaries of the SMSF to support the application if a personal guarantee is provided.
Low doc and bad credit options
Some lenders require your most recent two years tax returns but there are some lenders that offer SMSF low doc loans.
Other specialist lenders also offer bad credit solutions if your credit file isn’t strong and you can provide good explanations about how you fell into financial hard times.
Can you borrow the amount you need?
Some lenders restrict the amount you can borrow or the Loan to Value Ratio (LVR) when it comes to SMSF lending.
Most lenders will limit your borrowing to 75% of the property value but, with others, you may be able to borrow up to 80% of the property value.
It may not sound like a lot but an extra 5% can mean the difference between getting a great investment property with strong rental returns and missing out.
For commercial property, you’re normally limited to borrowing up to 70% of the property value.
Need help to compare SMSF loans?
Not many mortgage brokers understand SMSF and trust loans but we do! We’re credit experts and understand the complexities, even when the banks don’t!
Call us on 1300 889 743 or complete our free assessment form and discover how we can help you borrow for your SMSF.
Are you getting a sharp interest rate?
There can massive differences in interest rates depending which lender you speak to.
With some banks, you have to pay commercial or business interest rates just because they will only assess your application through their commercial credit department.
With other lenders, particularly non-banks, you may qualify for an interest rate that’s closer to a standard home loan interest rate.
Lender choice matters but how you package the application is just as important. This is where a specialist mortgage broker can make a huge difference to your application.
Don’t just compare the interest rate!
There can be a number of costs associated that are unique to SMSF loans so don’t just weigh up the costs of the interest rate.
With increasing competition in SMSF lending, lenders are offering much lower upfront (application) and ongoing fees. However, legal fees can still be quite high with some banks.
These legal costs are for the lender to review your SMSF trust deed and your property custodian deed, although the latter isn’t reviewed in all circumstances.
You can expect to pay anywhere between $1,500 to over $2,000 and this doesn’t include the separate solicitors fee you need to pay when you settle the property.
Some banks provide a panel of solicitors which helps to drive down these legal costs but there’s one more thing to consider.
Most banks require you to get financial advice before they even consider your application so you should factor this price in when you compare SMSF loans.
A financial plan for your SMSF can set you back anywhere between $1,500-$2,000.
Be careful of LMI!
When borrowing more than 70% of the property value, you may have to pay thousands of dollars up front in Lenders Mortgage Insurance (LMI).
However, this isn’t the case with all lenders so call us on 1300 889 743 to find out if you can avoid LMI.
What features are available?
- Longer loan terms: Some lenders only offer 15-year terms for SMSF loans but if you can get approved for a residential mortgage, you can get 25 to 30 years.
- Interest only: Some will allow up to 15 years interest only but if you have to go down the commercial loan route, you may only qualify for a 5-year interest only term.
- Offset account: Not all lenders offer an offset account. It’s a good feature for some borrowers but if you keep minimal cash in your SMSF and you’re happy with your deposit account, it may not be so important for you to have one.
We can help you compare SMSF loans!
It’s recommended that you seek independent financial advice before considering borrowing for your SMSF.
Work out your financial goals and then speak with one of our experienced mortgage brokers about what you plan to do.
We’re credit experts so call us on 1300 889 743 or fill in our online enquiry form today.