Borrowing to purchase an investment property can provide your self-managed super fund (SMSF) with a range of benefits. However, it’s important to go with a lender who specialises in SMSF lending. Read on to find out why.
1. Legal compliance
SMSF borrowing must be done under limited recourse borrowing arrangements (LRBAs) to comply with Australia’s superannuation legislation. Specialist SMSF lenders fully understand LRBA requirements so they can ensure your legal compliance.
The alternative is to go with a non-specialist lender who isn’t as familiar with the strict LRBA requirements for setting up your loan. There are heavy Australian Taxation Office penalties for any SMSF trustee that doesn’t have legally compliant SMSF loans.
2. Asset protection
Borrowing under an LRBA ensures that the other assets in your SMSF cannot be repossessed and sold if you default on your repayments. The property you buy via your SMSF is the only SMSF asset that is secured against the loan. All of your other SMSF assets are protected.
3. More investment diversification opportunities
Borrowing to invest in property is one of the major benefits that self-managed super funds enjoy over other types of super funds in Australia (like industry, retail, government and company super funds). It, therefore, provides your fund with more investment diversification opportunities.
Diversification can help you maximise your SMSF investment returns and minimise your risk. It prevents you from having all of your SMSF ‘investment eggs’ in one basket.
Having a diversified portfolio means that when one sector of the investment market is outperforming others, you don’t miss out. The opposite also applies — when one sector of the market is underperforming, you’re not totally exposed by having all your SMSF investments in that sector.
It’s no secret that the residential property market in Australia has been booming over the past couple of years. Savvy SMSF investors have capitalised on the boom.
In addition, property in Australia has a long-term growth trend.
SMSFs also allow you to diversify in terms of the type of property you buy. For example:
- – residential property (including borrowing to build)
- – commercial property
- – rural property.
For example, when COVID-19 first came to Australia, the value of commercial investment properties significantly dropped as demand fell. However, there was a rental shortage which saw the value of residential property increase along with rental income — it was the perfect time to purchase residential property even though commercial investment property wasn’t performing well.
4. A higher loan-to-value ratio (LVR)
A loan-to-value ratio is a calculation that lenders make when assessing a loan application. It’s the value of the loan expressed as a percentage of the lender’s valuation of the property. For example, if you want to borrow $800,000 for a property that’s valued at $1,000,0000, the LVR would be 80% (i.e. $800,000 divided by $1 million).
Specialist SMSF lenders like those we deal with at SMSF Loan Experts will be prepared to lend to an LVR of up to 80%. Some non-specialist lenders will only be prepared to lend up to an LVR of a lot less than 80%. This means that you may be able to borrow more to buy a better property by getting your finance using a specialist SMSF lender.
The bottom line
Borrowing to invest in residential or commercial property via your SMSF can be a great way to grow your retirement savings, but it’s crucial to ensure that your SMSF home loan complies with Australia’s superannuation regulations. Specialist SMSF lenders can help to ensure your legal compliance.
At SMSF Loan Experts, we know the ins and outs of SMSF home loans. Contact us today if you’d like to learn more.
