How to Find the Best SMSF Property Loans
For Australians who have set up their own self-managed super funds (as well as those who are intending to set one up soon) it is important to realize that along with the usual investments trustees are allowed to manage, they can also now include property investments as part of the equation. Elsewhere on the site we have already explored how self managed super funds work and how to invest in property with an smsf. However, just because it is possible to get a self-managed super fund loan, doesn’t mean it is easy to get a good one! In this article, we will consider what you need to look for when trying to find a super fund property loan and how to work out which SMSF loans are good value.
This is not as easy as it sounds, because SMSF property loans still represent a very small percentage of the property loans market, even if they are very important to people with self-managed super funds. And they are of course more complex, involving appointing a property trustee who is the person who actually buys the property for the fund and then handles everything from the deposit and exchange of contracts to rent collection, property admin and loan repayments. The trustee will do this until the loan has been repaid at which point the title will be returned to the SMSF itself. This complexity, as well as the fact that the lenders can often only seek recourse (in case of default) through the loan property itself (and not through other assets in the fund) tends to mean the banks are reluctant to lend to SMSF’s. They see them as a greater risk for less reward with more work involved!
However, things are slowly starting to change and there are more and more lenders coming to market offering SMSF property loans. But how do you compare them and work out which is the best?
When it comes to comparing the best SMSF property loans on the market there are some difficulties to consider. These SMSF loans (also sometimes referred to by the catchy title of ‘limited recourse borrowing arrangements’) are wide ranging in their possible structures and terms in the same way that there are hundreds of different property loans on the regular loan market. However, what makes things really complicated from the point of view of trying to draw comparisons, is that the things that may appeal to the trustees of one fund might not appeal to the trustees of another. So varied are the arrangements of most self-managed super funds that it is almost impossible to objectively decide which loans would be best for a particular fund. As an example, it might be that your own fund is very keen on a loan offering an interest offset account. For other people who have funds with very small cash balances this would be of little use at all.
That said, it is possible to easily find all of the available SMSF loans out there and compare and contrast them to make sure they contain certain essential features. Start by researching online and drawing up a list of all the companies offering SMSF loans. Then cull that down to the most reputable lenders and if in doubt, search for more detail about any company name you don’t recognise. (If you need any help getting things started drop us an email at … or call us on … and we can offer you some suggestions.) Once you have done this it is time to check through all of their loans and see if they answer the following questions:
How Much Can I Borrow?
As with all loans for investment property the LVR (or lending valuation ratio) is a good place to start. Typically, a self-managed super fund will be allowed to borrow as much as 80% for the purchase of a residential property provided the fund has a corporate trustee. Should the fund have individuals as trustees this would decrease to 72%. On average SMSF’s are usually allowed to borrow anything from $200,000 to as much as $2,000,000.
Who Is Eligible?
Many banks make it a requirement that all of the fund members are included in the accumulation phase. There are other lenders that might insist that the SMSF has a minimum net asset level that does not include the property to be bought. You should always compare and contrast the eligibility requirements of any loans you are considering.
What About Servicing the Loan?
Will your SMSF be able to service any interest on the loan? Most banks will count on 80% of rental income (net) from the loan property as well as concessional contributions up to a total of $25,000. There are even some lenders who will be willing to consider dividend income and other investment income in your fund.
What are Their Loans and Interest Rates Like?
Most lenders will offer SMSF’s loans that include the principal and interest and will offer interest only loans (as well as fixed or variable or combination) with terms of between 3 and 30 years. They will also tend to use the standard home loan rates on residential property loans. However, some will try to use business rates, so avoid these if possible.
Will They Require Mortgage Insurance?
Not usually, no. However there are some non-bank lenders out there who will ask the fund to pay for mortgage insurance if the lending valuation ratio is in excess of 70%.
How Expensive are Their Application Fees?
When they first came out they were quite expensive, but as competition has increased these have started to come down. Currently fees for residential loans for SMSF’s range from about $500 to $3500 depending on the size of the loan.
Are There Loan Servicing Fees?
Yes, most lenders will charge these at about $10 a month for residential property loans.
Do Lenders Charge Legal Fees?
Unfortunately, yes, this is an extra cost. Lenders will charge you the cost of them reviewing both your custodian deed and your SMSF trust deed. This will normally set you back between $1400 and $2500 although it is possible for these fees to go even higher. Some lenders have tried to bring these costs down by offering their customers a solicitors panel and by providing a custodian deed template to be used.
Do Lenders Require Me To Take Financial Advice?
Not all of them but a lot of the bigger lenders require that their fund trustees take financial advice from a suitably qualified independent financial adviser who must check that the loan does not conflict with the objectives of the fund. They also want the financial adviser to ensure that the trustees know all the risks of the investments they are taking on. Though independent financial advice is always advisable for an SMSF, this is another significant cost that a lender can force you to pay so look out for this requirement when comparing loans.
What Happens In Case of Default?
One essential thing that you must ensure you get is a limited recourse loan. This means that if you or your fund defaults on the property for any reason, the lender will only be able to recover the loan debts from the property they have funded and not from any other assets in your fund. Everything else in your self-managed super fund will remain protected. If a loan does not offer this then you need to move on to a different lending company.
Do They Require a Personal Guarantee?
Yes, most lenders will require the trustees of the fund to provide a personal guarantee. If that is the case it may well be the case that you need to take independent legal advice too.
Do They Offer an Offset Account?
As mentioned above, it is possible to get additional features with some loans. One example is an offset account on residential property loans which can be extremely useful if your SMSF holds onto cash for the purpose of liquidity.
Help, I Can’t Choose!
All of the major lenders, from AMP and BOQ to CBA, NAB, Westpac and St George now offer
SMSF property loans. Other smaller lenders to consider include Suncorp, State Custodians, Macquarie, Bendigo and Liberty Financial. If you need help choosing one it is essential that you speak to a financial adviser who specialises in self-managed super funds and is qualified to offer independent advice. They can give you a better perspective and help you to choose a loan best suited to the unique circumstances of your fund.