Self Managed Super Fund
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Are you a Self Managed Super Fund (SMSF) trustee and do you want to borrow money to invest for your trust? Read on to find out what you need to qualify.
Haven’t yet set up your SMSF, contact your accountants, lawyers & financial advisers to ask them to explain how this would help with your situation. And set up your SMSF What are SMSF Home Loans? SMSF home loans are exactly what the name suggests, a loan to your Self Managed Superannuation Fund trustee. |
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The SIS Act generally prohibits the trustee of a regulated superannuation fund, which includes SMSF, from borrowing money. However, it does allow an SMSF trustee to borrow money to acquire certain kinds of assets, including residential & commercial investment property, provided that certain conditions are met.
One of these conditions is that any rights of the lender or other person against the SMSF trustee is limited to the asset acquired with the borrowed money. This is what is often referred to as a “limited recourse” loan.
The security custodian trustee will acquire the property using a deposit paid from the SMSF together with the loan.
The security custodian will be the legal owner of the property but will hold the property in trust for the SMSF trustee. This trust is called the security trust. The SMSF trustee will have a right to become the legal owner of the property by repaying the SMSF loan in full.
How much can your SMSF borrow? As a general rule-of-thumb a bank will lend up to 80% of the value of a residential property and ask for a guarantee from the trustees, a guarantee may not be required for SMSF home loans below 60% of the property’s value. The benchmarks on commercial property are 70% and 50% respectively. Factors the bank will assess are property quality, credit history and rental income in assessing the need for a guarantee.
Note: Lending policies for SMSFs vary between lenders, particularly in the way they assess your ability to repay the loan.
Why use a mortgage broker? There is a vast difference in the offerings from the major banks, 2nd tier banks and non-banks for super fund mortgages for residential and commercial investment loans.
When is a SMSF allowed to borrow money?
There are laws restricting the use of SMSFs to borrow money, and restricting the recourse of the lender in the event that the trust cannot meet its repayment obligations.
A basic outline of the rules a trust must follow in order to borrow money, is as follows:
One of these conditions is that any rights of the lender or other person against the SMSF trustee is limited to the asset acquired with the borrowed money. This is what is often referred to as a “limited recourse” loan.
The security custodian trustee will acquire the property using a deposit paid from the SMSF together with the loan.
The security custodian will be the legal owner of the property but will hold the property in trust for the SMSF trustee. This trust is called the security trust. The SMSF trustee will have a right to become the legal owner of the property by repaying the SMSF loan in full.
How much can your SMSF borrow? As a general rule-of-thumb a bank will lend up to 80% of the value of a residential property and ask for a guarantee from the trustees, a guarantee may not be required for SMSF home loans below 60% of the property’s value. The benchmarks on commercial property are 70% and 50% respectively. Factors the bank will assess are property quality, credit history and rental income in assessing the need for a guarantee.
Note: Lending policies for SMSFs vary between lenders, particularly in the way they assess your ability to repay the loan.
Why use a mortgage broker? There is a vast difference in the offerings from the major banks, 2nd tier banks and non-banks for super fund mortgages for residential and commercial investment loans.
When is a SMSF allowed to borrow money?
There are laws restricting the use of SMSFs to borrow money, and restricting the recourse of the lender in the event that the trust cannot meet its repayment obligations.
A basic outline of the rules a trust must follow in order to borrow money, is as follows:
- The borrowing must be used to finance or refinance the acquisition of a “single acquirable asset” (the residential or commercial investment property) which the SMSF trustee is not otherwise prohibited from acquiring by the SIS Act or any other law. The borrowing may also be used to meet expenses incurred in connection with the borrowing or acquisition (such as conveyancing fees, stamp duty, brokerage or loan establishment costs), or in maintaining or repairing the asset. However, the borrowing cannot be used to meet expenses incurred in improving the asset.
- The asset is held in trust (the security trust), also known as a bare trust, so that the SMSF trustee acquires a beneficial interest in the asset.
- The SMSF trustee has a right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest in the asset.
- The rights of the lender or any other person against the SMSF trustee in connection with any default on the borrowing are limited to rights relating to the asset. This protects the other assets of the SMSF. This limitation applies to any rights of recovery that the security custodian and any director of the SMSF trustee may have against the SMSF as a result of their guarantees and the mortgage.
- If, under the arrangement, the SMSF trustee has a right relating to the asset (other than the right to acquire legal ownership) the rights of the lender or any other person against the SMSF trustee in connection with or as a result of the SMSF trustee’s exercise of their rights are limited to rights relating to the asset.
- The asset is not subject to any charge including a mortgage, lien or other encumbrance.
- Each borrowing arrangement can only be for a “single acquirable asset”. In the case of strata title or subdivisions, each title is considered a separate asset.
