Gear your SMSF Property Investing
Historically, self-managed super funds couldn’t borrow except in very limited situations. In recent years, thankfully things have changed. Although there are still tight restrictions, SMSF loans can give you a wide variety of investment purposes.
One of the requirements is the SMSF property is held in a bare trust within the fund with its own corporate trustee (distinct from the SMSF trustee). With a limited recourse loan that doesn’t lay claim to other assets of the fund. This allows the members of the fund to provide personal guarantees for the borrowing.
A number of costs are higher in relation to both the loan and the property due to the complications involved, but there are some really significant benefits.
What are the Benefits of an SMSF loan?
- Investment returns are multiplied
- SMSF loan payments are funded by member contributions and other investment returns - as well as rental returns
- Ownership of business premises may be made possible for business owners
- In some situations, if the asset moves into the pension phase during retirement, no capital gains tax may be payable when it is sold
SMSF Loan FAQs
How much can I borrow?
The number one most asked question, with an answer that’s different for each person. Because it's all depending on what your income is and the value of the property(ies) that you have to use as a security for the loan. (See the answers for "Serviceability" and "LVR" below)
What is a "LVR"?
LVR stands for "Loan to Value Ratio." It’s calculated by dividing the loan amount by the value of the securities involved. Lenders limit the amount you can borrow according to this LVR rule. Generally, most people can borrow up to 80% LVR (that’s 80% of the value of the property) without penalty. In some cases, by paying for "Lenders Mortgage Insurance" (See "LMI" below) up to 95% can be borrowed, or even 97% where the cost of the LMI becomes included within the loan amount ("capitalised LMI").
What is "serviceability"?
Your ability to generate enough income to cover loan payments is described as "serviceability." Each bank has its own way of calculating how much income you need. The interest rate will be higher than present rates in the calculation to allow for rates going up in the future causing undue stress on your financial situation. Credit cards and loans not being refinanced will have payment amounts increased to cover the amount owing as if the facility was fully drawn. That means that if you have a credit card with a very large credit limit it will be harder to qualify for a loan.
Part of the equation that most people ignore is what they spend their money on. With your broker being required to make reasonable enquiries into your spending, including examining bank accounts, to verify your estimates of your living expenses. While the banks will have minimums for each family situation, they want it to be adjusted upwards to match your particular situation. Where you have obligations such as insurances, pay TV and club memberships, those amounts will all need to be added on top of their minimums or your other normal living expenses.
What is "LMI"?
"LMI" is "Lenders Mortgage Insurance." This insurance doesn't protect you, it protects the lender. Many lenders will ensure all of their loans, only passing this cost to you when you’re over 80% LVR (see LVR question above). A few lenders will go up to 85% LVR without charging you for LMI, and several of the major banks will allow up to 90% LVR for certain medical professionals.
LMI costs vary according to the LVR and amount borrowed. With slight variations from one lender to another. It's not unusual for a borrower to be charged something on the order of $10,000. Part of your mortgage broker's preliminary assessment will be to provide an estimate of what the LMI charge will be for the recommended lender. Your broker should also be able to show you how the LMI varies from lender to lender in your particular situation.
Is loan interest tax deductible?
That's a great question, to answer that you’ll have to head over to GraceFinancial.com.au, our financial planning website, and learn more about tax-deductible investment expenses there.
What documentation do I need to provide to apply for a loan?
It varies slightly from bank to bank, but for PAYG income earners this would be typical:
- Your last two payslips
- Your last Notice of Assessment (Find it at MyGov - ATO) or Group Certificate (from your employe)
- ID verification with Drivers Licence & Passport or Birth Certificate + proof of change of name, if applicabe
- Medicare card
- The last six months of statements for all transaction accounts and credit cards
- Rates statements for existing properties being used as security
- The contract for properties being purchased (unsigned but with purchasers' names and purchase price)
For self-employed borrowers, generally you’ll need to have your ABN for two years, and most lenders want two years of financial reports, tax returns and Notices of Assessment too.
Self-managed super funds are the realm of financial advisers, so the place to begin is with our own financial planning division at Grace Financial Services. Once we've worked out the best overall financial planning strategy, we can discuss your loan needs through our lending division, Grace Loans.Note that while there are potential benefits to gearing within an SMSF, it does increase the level of risk. Both positive and negative returns are multiplied, so careful attention is needed in asset selection. Depending on your circumstances and investment time frame such gearing might not be appropriate for you. Getting specific, personalised advice taking these matters into consideration is vital. That advice should come from professional legal, financial, accounting and lending advisers.