The Pitfalls and Potential of Purchasing Property Through A Self Managed Super Fund (SMSF)
What You Need To Know
You’ve got funds sitting in your super, you want to invest in property and you’ve heard of super fund loans – Sounds like a no-brainer? It’s certainly an excellent opportunity for many, but also a complex borrowing area and one that needs expert advice.
Superannuation home loans have gained popularity since the 2007 legislation change that has enabled SMSF borrowing. A lot of our clients have recently enquired about using their super to buy investment property after having received financial advice about the benefits of using their self managed super fund (SMSF) as an investment vehicle for tax and other financial benefits. However the process for obtaining a mortgage for a self managed super fund property purchase is often more involved than a normal purchase. There are many strict self managed super fund rules and regulations and in particular relating to self managed super fund loans.
In this post, I will explain what you need to consider when using super to buy a house from a financing perspective, and what you will need to show lenders.
What Is A Self Managed Super Fund Property Loan?
Firstly let’s be clear on these super funds. A SMSF is a small superannuation fund with less than five members in it, and usually set up by a few family members. Unlike an industry fund, they are run by their members for their own benefit, and the members themselves control where superannuation contributions are spent and invested. Setting up a SMSF generally requires advice from a financial planner or an accountant who will usually set up a company or trust that holds their clients’ superannuation funds.
Many Australians now contribute their super into an SMSF rather than a standard industry fund. According to the ATO’s latest statistics, SMSFs now account for 99.5% of all superannuation funds and 29% of the $2 trillion in total superannuation assets in Australia. SMSFs also experienced on average, a positive return on assets of 9.8%.
A SMSF Loan is a special type of loan that enables you to invest your super in property. Purchasing a property through an SMSF means that instead of the individuals being the owners, it is the SMSF company or trust that is the legal owner of the property (with its members as the beneficiaries). This could mean as advise by our accountant that the rental income and expenses are recognised by the SMSF (rather than its members) as its own income and expenses and each member doesn’t have to pay for tax on the rental income generated by the SMSF. Before making any decisions, always seek professional advice from your accountant or financial adviser.
The Pros and Cons of Using Super To Buy A House
The idea for many, when using their super to buy investment property, is to hold the property over the long term and have it paid off for retirement so that they have another avenue of income.
Financial planners and accountants often suggest investing through an SMSF because of the concessional superannuation tax regime. Self managed super funds are only taxed at 15% – which can be advantageous if the super tax rate is lower than the SMSF members’ personal tax rates. If the property is sold at the right time, the capital gains tax on sale may also be discounted.
However with benefits, come rules. Self managed super funds are highly regulated and self managed super fund investment rules include:
- who property can be purchased from
- what property acquired can be used for; and
- self managed super fund borrowing limitations.
Applying For Self Managed Super Fund Loans
How much your SMSF can borrow is assessed by lenders having regard to the following criteria:
- How much super is contributed by the SMSF members’ employers
- Expected rental income from the new investment property
- Any extra contributions made by members, averaged over the last two years
- Any other income earned by the SMSF (such as dividends from share investments) or other self managed super fund property
As noted above, there are strict SMSF borrowing rules, also known as ‘limited recourse borrowing arrangements’. As such, only a limited number of lenders will lend to SMSFs. Knowing the difference between lenders’ policies and the lending products they offer can either cost you or save you money.
Most SMSF lenders will only approve a maximum loan of 50%-80% of the value of the property and require evidence that the SMSF can meet repayments, as well as have enough cash leftover to manage ongoing costs, like accountants fees, ASIC annual review fees and property maintenance costs. This means that the SMSF will need to have sufficient contributions to start with, in order to afford the deposit and other costs relating to the property.
There may also be restrictions on what type of self managed super fund property you can buy:
- Certain postcode or zones are ‘black-listed’ by lenders
- Off-the-plan apartments may not be acceptable for some lenders, but may be able to be approved by others
- Land and house packages may also not be acceptable to some lenders
- Developing, renovating or extending a self managed super fund property may not be allowed
Interest rates on self managed super fund loans also tend to be higher than interest rates on normal residential mortgages as they can be treated as commercial loans by some lenders. Certain other lenders might have lower rates but higher fees, so finding the right mix is the key.
For those looking for a long term investment option, using super to buy an investment property can be a potential pathway to expanding your property portfolio.
What I’ve outlined in this post are only some of the complexities involved in self managed super fund loans, so it is extremely important to use an experienced broker who has a deep understanding of different lenders policies and is willing to work with your financial planner or accountant, to guide you through the process.
Mortgage Corp have successfully helped many clients with their self managed super fund property purchases. Why not request a Free Strategy Consultation today and find out how we can not only assist with your self managed super fund loan but structure your loans for long term investment success!
About Mortgage Corp
Based in Mount Waverley, Mortgage Corp is the most loved mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
While most banks and brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
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About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only few MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.