Self-managed super funds are special kinds of trusts that allow people to set up and then self-manage their own superannuation. Employer contributions are paid into the fund as usual but with an SMSF you (or your company) are the trustee responsible for managing the fund and you have complete control over where and how you invest, (so long as the investment is made with the sole aim of building funds for your retirement.) SMSF’s are discussed in more detail elsewhere on this site but this page will be examining the fact that you are also permitted to use your self-managed super fund to borrow money and invest in residential property in Australia. Of course, this won’t be for everyone. There are very specific circumstances in which people would decide to set up an SMSF and there are, in turn, very specific circumstances in which an SMSF can borrow to invest in property. However, for potential investors it is worth looking at those circumstances in some detail.
SMSF property loans will be an option to consider both for Australian residents who already have their own established self managed super fund and for those who are planning to set one up. SMSF’s are allowed to borrow anything from $200,000 up to $2,000,000 and this means that they allow for the possibility of buying property worth more than the available funds in the SMSF. They are permitted to use rental income to cover the repayments and the loans available to SMSF’s include both ‘principal and interest’ as well as interest-only loans and come with flexible terms of between 2 and 30 years. As with regular property loans they can be set up based on fixed, variable or combination interest rates. Most importantly it is also possible to find limited recourse loans in which the recoverable amount (in the event of a default) will be limited to the secured investment property alone, whilst every other asset in the self managed super fund is protected.
How does it actually work in practice? Quite simply really, (though there are a lot of caveats as we will see in the FAQ below.) Firstly, the trustee(s) of the SMSF would choose a residential property (hopefully using our Investment Property Guide first!) Then they would appoint someone known as a ‘property trustee’ whose job it is to buy the property on behalf of the fund. The self managed super fund would then apply for a SMSF property loan. If approved, the property trustee would then be responsible for paying the deposit and exchanging contracts. On settlement the property trustee would then also mortgage the property to the bank and they would in turn advance the loan. The property trustee would thereafter be responsible for collecting any rents, paying the admin costs (and any other outgoings) and repaying the loan. They would continue doing this until the loan was repaid at which point the legal title on the investment property would be transferred from the property trustee back to the SMSF.
SMSF property loans are quite new to the market so many investors will not yet be familiar with how they work. Here are some of the most common questions that investors need answers to:
There are some important rules that have been put in place as to how an SMSF can borrow money for a property investment and which also limit the lender when things go wrong. In brief, a loan to an SMSF must stick to the following:
There are some restrictions in place on what SMSF’s can do in terms of loans:
This is slowly changing but generally major banks see loans to super funds (with the aim of buying property) as being not worth it because there is only a small market demand, the trust loans can be overly complex and because in case of default they only have recourse against the property itself. In other words, they don’t want to do more work for less profit with a higher risk! However, there are more and more lenders coming to the market all the time and as with all things, it will likely not take long for the mainstream lenders to join the party if they think they are missing out on a potential income stream!
Do your research online for starters. There are plenty of companies offering such loans now. However, finding a good one that ticks all the boxes for your particular fund may take a bit of time. If you want some help choosing the best property SMSF loans, why not drop us a line at … or give us a call on … and we’ll be able to recommend some reputable companies.
Because the lending process is slightly more complex, we recommend that you put in your loan application at least three weeks before you start to look for your property. This allows you time to make changes and amend your strategy and to ensure that everything is in place if you find a property you wish to move on quickly.
Assuming you have already got all the necessary documents in place, the pre-approval application will normally be assessed and accepted by a lender in about 7 to 10 days.
On a standard SMSF residential property loan you will potentially be able to borrow up to 80% of the value of the property. Generally however, most lenders cap borrowing at 75%. If you were to apply for a loan for commercial property this would drop to 70%. As with normal property loans, some lenders will offer SMSF loans with discounts and some even offer SMSF low doc or bad credit loans, although this is extremely rare.
The main thing that the banks / lenders need to see from an SMSF applicant is proof that there is enough income built into the trust to support a property loan. They will want to check the income from the trust by looking at least two years of tax returns and comparing those tax returns to the repayments that will be due on the loan. They will also take into account any planned rental income from the property. There are even some lenders who will be willing to consider the income of the SMSF members so long as those members would be willing to provide a personal guarantee.
SMSF loans are granted to the SMSF’s trustee and a security custodian is used as mortgagor. As mentioned above, the lender only has the ability to claim back against the property and cannot claim against any other assets in the fund.
Broadly speaking yes. This will of course depend on the lender you apply to and the specific nature of your fund but generally you will only face higher rates if you are applying for a low doc or bad credit loan.
When it comes to SMSF loans people sometimes think that there is no requirement for a deposit up front. This is not true. You will still need 25% of the purchase price up front. That 25% would then cover the 20% deposit as well as the stamp duty on your purchase, in the same way you would have to with a regular loan. The only reason people sometimes describe SMSF loans as ‘no deposit’ is because you can use your existing superannuation itself as the deposit. Thus, if you have $150,000 in your fund already, you would be able to move it over and use it as a deposit on the property you want to buy for the fund.
Along with your application, you will be required to provide a certified copy of the SMSF deed of trust, a certified copy of the property trust and some kind of proof that you will be able to service the loan. This proof could be bank statements, tax returns or future rental estimates on the property.