For those managing their own retirement savings through a self-managed super fund (SMSF), investing in property might be considered as part of the investment strategy. However, a poor credit score can complicate the process of obtaining an SMSF loan. Despite this, there are strategies to improve your chances of securing financing, even for borrowers with a bad credit history. Let’s explore how you can navigate the process and access a bad credit SMSF loan.
Understand What Lenders Look For
Lenders assess SMSF loan applications by examining things like:
- – The SMSF’s balance and cash flow to determine if the fund has a suitable income or liquidity to meet loan repayments.
- – Member contributions history.
- – Rental income potential of the property the borrower is looking to buy.
- – Credit history of the borrower.
Personal credit scores of the fund trustees are generally factored into the approval process, which may make things challenging if you have a bad credit history. Knowing this is key to understanding what you need to work on or provide as alternatives.
When assessing an SMSF loan application for someone with bad credit, lenders consider various aspects of your credit history in context, focusing on whether certain life events may have impacted your financial record.
A life event can include circumstances like job loss, divorce, the passing of a loved one or business challenges, for example. Lenders understand that these challenging situations often lead to temporary financial strain, potentially resulting in missed payments or defaults on loans and bills, and they’re sometimes willing to work with people who have a bad credit history because of challenging personal circumstances.
If you have bad credit due to life events, it’s essential to provide a clear narrative around these events and demonstrate that any credit issues were isolated or short-term setbacks. Lenders typically look for:
- – The amount and nature of any defaults: Document any outstanding amounts to clarify the scope of your financial situation.
- – Timing of the events: Specify when these challenges occurred so lenders can see if they were isolated incidents rather than recurring issues.
- – Current status of repayments: Showing that any defaults are now cleared or managed adds credibility to your application.
- – Evidence of financial recovery: Demonstrate that you’ve taken steps to regain financial stability, such as through a financial plan created with an advisor or accountant.
Providing thorough documentation of your circumstances can greatly strengthen your application, as many lenders evaluate credit issues on a case-by-case basis.
Check Your SMSF’s Financial Health
A solid financial position within your SMSF is crucial for offsetting the effects of a bad credit rating. You’ll want to ensure your SMSF:
- – Has enough liquidity to cover potential loan repayments.
- – Shows a track record of steady contributions.
- – Has a clear investment strategy that includes property as a financially sustainable option.
Some lenders may be able to work with poor credit scores if they see that your SMSF is financially stable and capable of managing the loan responsibly. For your application to be accepted, the lender will generally apply a higher interest rate to cover the additional risk they’re taking on. This doesn’t mean you’ll be stuck paying a higher interest rate though; you can always look at refinancing to a lower rate SMSF loan once your credit history has improved.
Improving Your Chances of Approval
While there are no guarantees, there are some things you can do that may improve your chances of approval.
Increase Your Deposit
If you can increase the deposit from within your SMSF, it reduces the amount you need to borrow and may make your application more appealing to lenders. A higher deposit reduces the loan-to-value ratio (LVR), lowering the lender’s risk. For example, if you’re borrowing 40% of the property value compared to 80% of the property value, the lender is much more likely to recoup their funds if you were to default on the loan.
Demonstrate Consistent Contributions and Income
Lenders want to see stability, so a reliable income stream and consistent SMSF contributions may help boost your application’s appeal. Ensure that all contributions to your SMSF are well-documented, as these records can reassure lenders about the fund’s cash flow and reliability.
Work With an SMSF Loan Expert
Brokers experienced in SMSF loans (like us at SMSF Loan Experts) can be invaluable, especially for those with less than perfect credit needing a bad credit loan. We can help strengthen your application and improve your borrowing capacity with our specialised SMSF loan strategies. If you have poor credit history and you’re looking for an SMSF loan, we’d love to help! Please get in touch with us today to discuss borrowing money for your SMSF.
