Self Managed Super Funds [SMSF] are now the largest and fastest growing segment in the Superannuation industry. The biggest reason people elect to manage their own superannuation is the flexibility to choose where their money is invested.
In 2007 superannuation law was amended to allow SMSFs to borrow money to purchase investment property. The SMSF lending industry has come a long way since this time and there’s now a large range of competitively priced loan options available to people who wish to invest their super money in property.
However take note: managing your own super is a big responsibility. Super is meant for your retirement, so there are special rules about how it is managed and when you can access it.
For more on this go here: https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf
You can only buy property through your SMSF if you comply with these rules;
|Principal & Interest
|Option to Fix
|Yes [only by SMSF]
|Can include; application fees, legal fees, valuation fees, monthly fees
|1st Mortgage Only
|Min Loan Amount
William and Jane Barker have an SMSF with $200,000 in cash and $50,000 in other assets. They would like to buy an investment property within their SMSF. The property, however, is worth $400,000 which means the SMSF doesn’t have enough money to cover the full cost of the purchase. In this instance, the SMSF trustees can apply for a SMSF Property Loan.
The Barkers seek independent financial and legal advice to ensure it is appropriate for their SMSF to borrow money and purchase an investment property. Once they have received this advice they begin establishing the trust structures required for the loan, ensuring they comply with the relevant superannuation laws.
The loan would then need to be taken out by the SMSF trustee. The Barkers will also need to set up a separate holding trust, which will be the legal owner of the property.
To purchase the property, the SMSF can use the $200,000 it has available in cash and borrow the remaining funds plus other associated costs, using the investment property as security for the loan.
The holding trust becomes the legal owner of the property, while the SMSF is the beneficial owner and receives the rental income.
The rent [and/or other income from the SMSF, such as investment income and super contributions] can be used by the SMSF trustee to make the loan repayments.
Image Source: Maquarie Bank
Note: It’s important to note that the loan is a limited recourse loan. In the event of a default, the lender has recourse to the property security and any additional security provided by the guarantors. However, the Lender will not have recourse to any other assets held in the Barkers’ SMSF. Once the loan is repaid the legal ownership of the property can be transferred to the Barkers’ SMSF.
We recommend clients obtain independent financial, legal and taxation advice before making any financial investment decision.
For more info or help arranging a SMSF loan please don’t hesitate to contact us anytime.
Sam & Matt
>> Free Finance & Wealth Evaluation +plus more…