An SMSF can obtain a loan to invest in a variety of investments such as shares or properties. Banks and lenders have tailored lending products for SMSF’s. Depending on the SMSF’s structure and the type of investments (commercial or residential properties), the loan to valuation ratio is typically ranging from a maximum of 65 –80%.
How an SMSF Loan Is Different from A Home Loan
Fees and Charges
Fee is the one of the most conspicuous difference between an SMSF loan and a home loan. An SMSF loans are often viewed by lenders as commercial loans; therefore, commercial loan fees apply.
Interest Rate
Apart from establishment fees, the variable interest rate for an SMSF residential property loan is often about 100 basis points more than a discounted variable rate home loan. At the time of writing an SMSF property loan is approximately 5.70% whilst a home loan is 4.70%.
Liquidity Requirement
As a general overview, most lenders require 10% of total assets or 10% of total debts to be in liquid assets post settlement. For example, total value of the SMSF’s assets is $400,000 and total loan is $200,000 (estimated post settlement) in the Fund. The liquidity requirement would be $40,000 or $20,000 depending on the lender and their liquidity requirement. This is a protection also for SMSF Trustees/Members to ensure they can comfortably meet their loan repayments and other costs post settlement.
Redraw Facility
Another key difference is an SMSF cannot redraw against the property whereas most home loans enable you to redraw unused equity up to the loan to value caps offered by lenders. Extra repayments are generally fine on most variable rate SMSF loans. However, SMSF’s cannot redraw the extra funds it has paid generally, and it cannot then use that property as a security for another investment property later on.
Not all lenders offer SMSF loans
SMSF loans are a lending niche, and not all lenders offer these solutions. Further, some lenders have more appetite (and expertise) for certain deals than others. Certain Banks and Lenders might impose a requirement for Trustees to seek financial advice regarding borrowing in the SMSF.
Some lenders who offer SMSF loans lack processing capability to ensure the deal runs in a timely manner, which can result in additional fees and penalties. For more information on loans in super, please visit our SMSF loans page here.
Bank and Broker Information
Trustees are free to use any banks or lenders when arranging finance for your SMSF property purchase. To get the best deal possible, you’d be well advised to use a mortgage broker. You can use a big bank or one of the niche players like Macquarie who, by the way, have a very informative free brochure with some great examples. You can also download a cash flow analysis brochure here which gives examples on the cash flow details of an property with a limited recourse borrowing arrangement in place.
You can contact Robert Sestan from Park Road Finance and Matt Atkinson from Condor Finance Partners for more information. Their contact details are noted below:
-
Robert Sestan
(Park Road Finance)
P: 0410 514 887
E: robert.sestan@parkroadfinance.com.au -
Matt Atkinson
(Condor Finance Partners)
P: 03 9670 0222
E: admin@condorfinance.com.au
W: Home – Condor Finance Partners
It is Trustee’s responsibility to ensure the SMSF loan adhere to the ATO rules and regulations. Please click the button here for more details on the ATO rules:
Frequently Asked Questions on SMSF Borrowing Loan Refinance
Can I refinance an existing SMSF loan?
Trustees as managers of the Fund have a choice of which lender to deal with. This includes refinancing an existing SMSF loan. There are certain ATO requirements to be mindful of when Trustees refinance a loan. Firstly, the Bare Trust details might need to be updated in order to reflect the new lender. Secondly, the new lender might request for a change to be noted as the first mortgagee on title. Lastly, remember to advise your SMSF accountant about the lender’s update to be reflected in the records of the SMSF.
What should I take into consideration when refinance an SMSF loan?
When refinancing an SMSF loan, some items below to be considered are as follows:
- Terms and conditions: Make sure you are familiar with these terms and conditions before you decide to refinance.
- ATO requirements: When refinancing an SMSF loan, as per the ATO requirements, you cannot increase the amount you are borrowing. Your new loan must be for the same amount as your existing SMSF loan. Moreover, the Trustee does not allow to acquire legal ownership of the property during the process of refinancing the SMSF loan.
- Interest rates: Make sure you are aware of the average rate on the market at the time to ensure the SMSF is getting a fair deal.
