SMSF Home Loan rates from 6.99%

What is an SMSF loan?

If you're a trustee of a self-managed super fund (SMSF), you could take advantage of a SMSF home loan to invest in property.

Purchasing property in Australia can be a pricey endeavour, but using an SMSF home loan can make this asset class more accessible.

How does an SMSF loan work?

SMSF loans and Limited Recourse Borrowing Arrangements (LRBAs) are one and the same.

As the name suggests, a bank or lender offering LRBAs has limited means of recourse if a borrower defaults.

If a default were to occur, an SMSF lender can only repossess the asset used as security against the loan - the property purchased - which will be held in a separate trust. It cannot recoup any losses from the broader SMSF or the members themselves.

Which lenders offer SMSF loans?

Not every bank or lender will offer SMSF home loans. Here are some that do:

• Firstmac
• loans.com.au
• Liberty
• La Trobe Financial
• WLTH

How much money does an SMSF need in order to buy property?

A lender will typically require an SMSF to have a balance of around 20% of a property's value before providing a loan for the remaining amount. This is mainly to ensure the fund can cover any expenses that may arise after settlement.

How does the SMSF loan application work?

Applying for an SMSF loan works similarly to applying for a regular home loan, though there may be some noticeable differences.

Here is how an SMSF loan application generally works:

1. Identify the right property for a fund to invest in
   This process should see trustees considering factors such as potential capital gains, rental income, and market value, while ensuring the investment aligns with the fund's investment strategy. Remember, all assets purchased by a SMSF must be held 'at arms length' from all members, meaning neither yourself nor your relatives can live in or otherwise use a SMSF asset.

2. One trustee will act as a custodian
   This person will hold the property title on behalf of the fund until the SMSF loan is paid off.

3. The custodian submits the required documentation
   This person will also be responsible for putting together the information needed by a bank or lender as part of the home loan application.

4. The custodian will put the property up as security
   This step will occur after the bank green lights the application.

5. Stamp duty and other legal fees must be paid
   Purchasing property through a SMSF doesn't mean bypassing other requirements of property investing, such as transfer duty and conveyancing fees.

6. Repayments begin
   Repayments on the SMSF loan can be made after settlement, with rental income used to pay off the loan. In cases where the rental income isn't enough to cover repayments, SMSF contributions can be used in tandem.

7. Finally, the property's title will be transferred to the SMSF once the loan is paid off

SMSF home loans: Pros and cons

Leveraging an SMSF to invest in property offers several benefits, including the opportunity to grow the fund's value. However, there are also downsides to using SMSF loans.

Pros

• Rental income is used to pay off the loan
  Properties purchased under an SMSF loan can pay for themselves, as rental income can be funnelled towards repayments.

• Diversification
  An SMSF borrowing money to purchase property can diversify its holdings while limiting risk, as the nature of SMSF loans means that, in worst-case scenarios, a lender can only repossess the asset secured against the loan.

• Access to higher-value properties
  By utilising an SMSF loan, an SMSF can invest in higher-value properties than it otherwise could, including properties that may exceed the value of the fund itself.

• Borrowed funds can be used to cover repair costs
  SMSF loans can be used to repair existing fixtures and fund maintenance works in a property owned by the SMSF.

• Tax benefits
  SMSFs are typically taxed at a rate well below most Australians' marginal tax rates and can realise capital gains tax discounts.

• Lower-risk SMSF borrowing arrangement
  SMSFs can borrow funds to invest in assets other than property, with such loans called margin loans. Margin loans can attract margin calls if the value of an SMSF's portfolio dips below a certain level, a stock they hold is suspended from trading, or its lender changes its policiesThat's not the case for SMSF home loans.

Cons

• Time and effort
  Getting an SMSF up and running is already tedious, and adding an SMSF loan and investment property will likely make matters more complicated. While the fund can hire professionals to get things done, the responsibility of ensuring everything meets compliance standards ultimately falls on the trustees' shoulders

• High interest rates compared to broader market
  SMSF loans typically attract higher interest rates than standard investment home loans

• Properties can't be improved using borrowed funds
  While SMSF loans can be used to repair and maintain the property, they cannot be used to make additions to the property, like building a granny flat or extending rooms

• Heightened risks
  SMSF property investments are considered riskier given the compliance requirements needed to securely carry out property investments

• Smaller pool of potential lenders
  Many lenders, including the big four banks, don't offer SMSF loans, so a fund seeking a lender will have fewer options to choose from