Self-Managed Super Funds (SMSFs) offer Australians the opportunity to take greater control of their retirement savings. One way trustees of an SMSF can grow the fund’s assets is through SMSF loans, which allow them to borrow money to invest in property, typically for residential or commercial use.
Key Features of SMSF Loans
- Limited Recourse Borrowing Arrangement (LRBA): SMSFs can only borrow through a structure called a Limited Recourse Borrowing Arrangement (LRBA). Under an LRBA, the loan is secured against a single asset (usually property), and in the event of default, the lender can only access the asset used as collateral. This protects other assets within the SMSF from creditors.
- Separate Property Trust: The asset being purchased must be held in a separate trust, often called a “bare trust” or “custodian trust”, until the loan is fully repaid. The SMSF holds a beneficial interest in the asset, while the legal title is held by the trustee of the bare trust.
- Loan Terms: SMSF loans generally come with stricter lending criteria, such as higher deposit requirements (often around 20%-30%) and slightly higher interest rates than regular home loans. Banks and other financial institutions will assess the SMSF’s cash flow and the quality of the investment to ensure the fund can service the loan.
- Investment Strategy: The property purchased must align with the SMSF’s investment strategy and comply with the “sole purpose test,” meaning it must only be used for generating retirement benefits for the members. For instance, the SMSF trustees or related parties generally cannot live in a residential property owned by the SMSF.
- Repayment and Management: The SMSF, through fund contributions or rental income, makes the loan repayments. The fund must be financially stable enough to cover these repayments while continuing to meet its other obligations to members.
Pros and Cons
Pros:
- SMSF loans can help the fund leverage investments and potentially boost returns.
- Rental income and capital growth from property are reinvested in the fund, growing members’ retirement savings.
Cons:
- SMSF loans carry additional costs, such as higher interest rates and establishment fees.
- A poorly performing property can hurt the fund’s returns and jeopardise its ability to meet your long-term goals.
- There are restrictions on loan purpose, such as the SMSF entity being unable to enter into construction contracts.
Why should you use one of The Loan Company’s mortgage brokers for your SMSF requirements?
- SMSF loans are complex, and direct access to lenders is limited.
- Our mortgage brokers specialise in SMSF loans and can increase your chances of approval.
- Major banks stopped offering SMSF loans in 2018 – only non-bank lenders that we are accredited with still provide them.
- SMSF loan fees and interest rates vary significantly between lenders.
- Not all lenders offer 100% offset accounts, which are important if your SMSF has substantial cash.
- We can assist with offset accounts to help reduce your interest and pay off the loan faster.
- Our mortgage brokers know which lenders offer offset accounts and can compare SMSF loans for you.
In summary, SMSF loans offer a pathway for super funds to invest in property, but the complexity and risks involved mean that trustees must carefully consider their strategy and financial capacity before committing to such an arrangement. Legal and financial advice is highly recommended.
