Sometimes you need to move quickly to take advantage of an investment opportunity for your self-managed superannuation fund (SMSF).
If you lent money to your SMSF to complete the purchase, can you refinance your private loan to pay yourself back and continue investing?
Am I eligible?
Generally speaking, you’ll need to meet the following criteria:
- You owe 80% or less of the value for the residential property: Most lenders will restrict borrowing to 75%.
- You owe 70% or less on a commercial property: Specialised commercial properties accepted on a case by case basis.
- Your SMSF meets acceptable liquidity requirements: You typically require 10-20% of the property value in cash and other liquid assets within your fund.
- Clear credit history: There are specialist lenders that may still be able to assist if you have some black marks.
In the past few years, many lenders have pulled out of the SMSF market completely.
Borrowing limits have pulled back and lending criteria have gotten tighter.
We are home loan specialists that understand how to refinance a private loan to an SMSF.
Call us on 1300 889 743 or fill in our online enquiry form and we can apply with a lender that will take a common sense approach to your situation.
How does it work?
Let’s say you, as the member, purchased a $500,000 property for your SMSF.
You used $100,000 from your fund and lent your SMSF $400,000 from your own funds (outside of the SMSF) to complete the purchase.
After 1-2 years of repayments, you can then refinance with a lender who will take on the property as security and pay out your private loan.
What documents do I need to provide?
The most important document you will need to provide is the loan agreement between you, the member, and the SMSF, stipulating the nature of the limited recourse borrowing arrangement (LRBA).
This will need to have been drawn up with help from an accountant and solicitor so that it is legally binding, just like a standard loan agreement with a bank.
The agreement should include:
- The loan amount.
- The purpose of the loan i.e. to purchase an investment property for your SMSF.
- The names of both the member and the SMSF trustee.
- The date the loan was transferred to the SMSF.
- The interest rate.
- Whether the rate is fixed or variable.
- Whether the rate is interest only or principle and interest (P&I).
- The loan term.
What other evidence do I need to provide?
- A copy of the trust deed.
- Your last two years tax returns for the SMSF.
- Your last two years’ SMSF statements showing the income stream of assets, cash, shares, member contributions, rental income and repayments for the private loan.
- A signed rental letter from your property manager or real estate agent.
- Bank statements showing when the transfer was made to the SMSF.
- Your last 6-12 months statements for any personal loan or credit facility you applied for showing consistent repayments.
- Council rates notice to prove ownership of the property.
To avoid delays, it is best to provide all of your documents up front and in one go with your application.
The interest rate needs to be at market value
The Superannuation Industry (Supervision) Act 1993 allows for the refinance of a limited recourse borrowing arrangement (LRBA) loan.
However, the interest rate on your private loan needs to be the same as the product you are using.
For example, if you took out a personal loan or you’re using the Line of Credit (LoC) against your residential property.
For a loan sourced from your own funds, you need to have applied a market value rate.
If not, the Australian Taxation Office (ATO) may be concerned that you are trying to circumvent the contribution limits.
Any income that you earn from the LRBA loan means the arrangement is not considered “at arm’s-length” and you will be taxed at the highest marginal tax rate (45%).
What are the costs of refinancing?
The following figures are examples based on a property valued at $500,000:
- Loan application fee: $200-$500.
- Property valuation: Between $600-$1000.
- Settlement fee: $200-$500.
- Government fees to register and transfer the property: $500.
- Conveyancing and other legal fees: %1,500-$2,000.
Is this an equity release?
No! You cannot access equity in a property owned in your SMSF.
Technically speaking, the refinance means that the bank is taking security over your property and paying out your loan as they would with a standard refinance.
What you do with those funds is your choice because those funds now sit outside the SMSF.
Refinance your private loan today
SMSF lending is a very specialised area for banks. Many of them often make mistakes and it is common to experience delays in approvals.
We will make the process smooth and simple!
Call us on 1300 889 743 or fill in our free assessment form and we can help refinance a private loan to an SMSF.