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%.
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.
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%.
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.
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.
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 Steve Gilbert from Gilbert Financial Advice & Services or John Gregory from Money Quest Finance Specialist for more information. Their contact details are noted below:
SMSF lending at times seems complicated and expensive. Certainly most banks and Mortgage Brokers do not understand the lending process that is required for SMSF’s. This leads to frustration and potential loss on retirement funds. Higher interest rates and fees can also mean less for your retirement. Also, wading through the rules, regulations and limits of borrowing capacities can be hard to navigate.
At GFAS, we have Mortgage Brokers that are specialised in this area who work with Financial Advisers. Our team will work on solutions that are specific for your requirements and that can mean some very big potential savings for you. Our service will make the process simpler as we work with all parties: accountants, lenders, brokers and investors to achieve the outcome for you. We use four main strategies and a full suite of products that are not available to all brokers.
In short, we offer a succinct and precise service, tailored strategies and a large suite of lending products to achieve your retirement goal. We also assist with other related lending as well.
Inquiries to Steve Gilbert on 0412 209595 for a no obligation and no fee initial review, so we can place you with a specialist Broker that suits your needs.
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.
When refinancing an SMSF loan, some items below to be considered are as follows:
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: