More borrowers are taking advantage of their Self-Managed Super Fund (SMSF) to finance their investment purchase.
Through an SMSF loan, you can fund residential and commercial property purchases, which can be used to help grow the SMSF members’ retirement savings. However, it is important to know that there are some key rules that must be followed when borrowing an SMSF loan.
Limited Recourse Borrowing Arrangement (LRBA)
Borrowers wishing to borrow an SMSF loan must understand the concept of limited recourse borrowing arrangement.
Prior to 2007, SMSFs were unable to borrow to invest in property. This changed with the introduction of LRBA.
An LRBA is a financial arrangement that enables SMSFs to purchase property with borrowed money. The purchased property will then be held in a separate trust structure.
The SMSF must be held in trust until the loan is repaid.
The LRBA protects all other assets in the SMSF. This means that if the SMSF defaults on the loan, the lender can only seize and sell the asset held in the trust and cannot pursue any other assets of the SMSF or its members.
An advantage of an LRBA is that it allows the SMSF to invest in assets that it may not otherwise be able to afford. This way, the fund is able to increase its returns.
Another main advantage of borrowing to fund a property within an SMSF is the concessional tax for capital gains.
For instance, a property held for longer than a year is taxed at only 10%. In the retirement pension phase, capital gains are tax-free.
However, the risks must be noted — it can potentially lead to SMSF being left with a debt that it cannot repay especially if the asset’s value falls significantly below market value or if the fund is unable to repay.
Loan size
Lenders will lend up to 80% of the property’s value and would ask a guarantee from the trustees.
Options after the loan term
SMSF loans typically have a term of up to 20 years. After the term, the SMSF has the option to either repay the loan and acquire full ownership of the asset or sell it during the term.
When selling the property, the proceeds are applied to the outstanding loan and any other associated costs. Any leftover will go to the SMSF.
Loan purpose
The SMSF loan must only be used to acquire a property. It cannot be used to improve or develop the property.
Generally, anything that can alter the property’s structure is prohibited. However, any improvements or developments must be financed using the funds within the SMSF.
Single acquirable asset
An SMSF can only purchase what is called a single acquirable asset using borrowed money. This means that the fund can only purchase one property with the loan.
If the fund plans to invest in multiple properties, it will need to take out separate loans.
Prohibited investments
SMSFs are not allowed to borrow to invest in properties owned by a related party. Furthermore, any member must not live in or rent in the property purchased.
Sole purpose test
The property being acquired by the SMSF with the borrowed funds must meet the sole purpose test.
Under the test, the property must be purchased solely for the purpose of generating retirement benefits for the members of the SMSF.
This also means that the borrowed money must not be used for personal gains, such as providing financial assistance to any members or their relatives, families, or friends.
Advertisement: See some of the lowest rates for SMSF loans that are available in Australia today.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.99% p.a. | 7.00% p.a. | $2,659 | Principal & Interest | Variable | $null | $720 | 70% | Featured |
| Disclosure | |||||||||
7.19% p.a. | 7.74% p.a. | $2,712 | Principal & Interest | Variable | $395 | $null | 60% |
| Disclosure | ||||||||||
7.19% p.a. | 7.74% p.a. | $2,712 | Principal & Interest | Variable | $395 | $1,185 | 70% |
| Disclosure | ||||||||||
7.19% p.a. | 7.65% p.a. | $2,712 | Principal & Interest | Variable | $395 | $1,254 | 70% | ||||||||||||
7.24% p.a. | 7.26% p.a. | $2,726 | Principal & Interest | Variable | $0 | $710 | 70% | Disclosure | |||||||||||
7.25% p.a. | 7.65% p.a. | $2,729 | Principal & Interest | Variable | $30 | $825 | 80% | ||||||||||||
7.74% p.a. | 7.76% p.a. | $2,863 | Principal & Interest | Variable | $0 | $710 | 80% | Disclosure | |||||||||||
7.75% p.a. | 7.83% p.a. | $2,866 | Principal & Interest | Variable | $0 | $995 | 80% | ||||||||||||
7.75% p.a. | 8.13% p.a. | $2,866 | Principal & Interest | Variable | $0 | $445 | 60% | ||||||||||||
7.49% p.a. | 7.50% p.a. | $2,794 | Principal & Interest | Variable | $0 | $720 | 80% | Featured |
| Disclosure |
Speak to an SMSF lending specialist
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Collections: SMSF
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