At SMSF Loan Experts, we help by taking the time to understand your financial needs so that we can advise the most suitable lending strategy to meet your financial goals.
Investing in property within your SMSF can be complicated — and even more so when you choose to borrow to invest. You need a lending strategy that can work with your fund’s investment strategy without getting caught out by government legislation, tax implications or fees and charges. Our SMSF Loan Experts work with you to make an informed decision and provide expert navigation through the entire lending process.
If you’re looking at borrowing to invest in your superannuation, here are some of the lending strategies that might be available to you:
Related Party Lending
Related Party Lending allows your SMSF to borrow money from any combination of sources when acquiring an asset. If you have enough cash or equity in properties, you could become the lender for your SMSF.
Example: You borrow $400k against your home to lend to your SMSF. You make the required repayments to the bank, and your SMSF forwards repayments to you.
The benefits of such a set up include:
- Avoiding expensive legal costs
- No limitations on what type of property investment you buy.
- Greater choice of lenders.
Things to consider:
- Losing access to the equity or cash which has been loaned to your SMSF.
- The maximum borrowing capacity for related-party loans is 70% of the value of the property.
- There are restrictions recently added by the ATO.
This is a complicated loan product that is not suitable for everyone. For this reason, it is crucial to access sound advice and information to know the suitability of investing via Related Party Lending and if it is an appropriate strategy for you.
Hybrid Lending occurs when your SMSF borrows some of the funds to purchase a property from a third party (such as a bank) and some of the funds from a related party (such as the fund’s trustees).
In essence, it’s a mix between a traditional SMSF loan and a related party loan. It can be particularly effective to circumvent the GST hurdle for commercial purchases or to bridge a small deposit shortfall.
The set up of hybrid lending is more complicated due to:
- Coordination of the different parties involved.
- The requirement for a more advanced bare trust.
- Comprehensive loan documentation.
The complexities of hybrid lending strategies in SMSFs require expert advice and guidance.
Things to know before you borrow to invest in your SMSF
- The SMSF will need to hold sufficient assets to cover the associated risks such as interest rate volatility or a decrease in the value of the property. Commercial properties may also be trickier to sell.
- It is the trustee’s responsibility to ensure the lending strategy is appropriate and that the SMSF meets all requirements. Strict lending criteria applies to all forms of SMSF lending. We can help guide you through this process.
- Your loan may need to be refinanced should there be any change made to banking or SMSF legislation (a refinance could mean losing your attractive interest rate — it may also mean finding a better interest rate!).
- The SMSF Trustee must ensure that the purpose of investment meets the Sole Purpose Test — that is, to ensure that the SMSF is maintained for the sole purpose of providing benefits to members upon their retirement.
- Stamp Duty may apply, which might reduce your available funds to offer as security.
Frequently Asked Questions Around SMSF Lending Strategies
How much can my SMSF borrow?
The amount you can borrow depends on whether you are looking to purchase residential or commercial property.
● Standard SMSF residential investment loans typically offer up to 80% of the property value.
● If you’re looking to purchase commercial property, most lenders will allow you to borrow up to 75% for properties that are non-specialised.
Is an offset account right for my SMSF?
SMSF Loan Experts will help you decide whether using an Offset facility should form part of your lending strategy. Offset Accounts can act as a type of savings account that helps to reduce your interest payments. It is linked to your loan account and can have the monthly mortgage repayments debited from it. The interest payable on your loan is calculated by subtracting the balance of your offset account from your loan balance — meaning you pay interest on a lower amount. In addition, an Offset Account can help keep cash available for future investments.
What are serviceability tests?
Similar to personal home loans, lenders for SMSF loans will assess whether you can service the loan repayments prior to accepting your loan application. The property’s rental income will form part of your serviceability test. We can help you with strategies to increase your borrowing capacity.