How does an SMSF home loan work?

An SMSF loan lets you leverage the funds in your self-managed super fund to purchase an investment property. Any rental income or capital gains from the property are reinvested, and can only be accessed at retirement. Strict conditions apply when using your SMSF to purchase property. They are:

The property must be used solely to provide retirement benefits to fund members

The property must not be acquired from a related party of a member

A fund member or related party cannot live in the property

As a rule, your SMSF must pass the ‘sole purpose test’ if it is to be eligible for the usual super fund tax concessions. This means it cannot be used for any other purpose besides providing a retirement benefit to you and other members.

If you reside in the property or receive income from it, this is considered a pre-retirement benefit. The Australian Tax Office explains that this is a serious offense, and can result in civil and criminal penalties.

How do I purchase a property through my SMSF?

You should also take extra care when filling out the property loan documents and contract, as you won’t be able to change the terms of the loan once everything is finalised.

If your application is successful, a custodian will put up the property as security with the lender. The loan is a limited recourse borrowing arrangement (LRBA), which means the lender is not entitled to any other assets held in the SMSF if the loan defaults.

You will need to make sure the SMSF has enough money to cover repayments, not to mention stamp duty, insurance and maintenance costs. If the property is rented out, the rental income must go towards paying off the loan and cannot be pocketed.

Once the loan balance has been paid off in full, the legal title to the property will be transferred from the custodian to the SMSF. At this point, your fund can continue receiving rental payments or the property can be sold off.

Understanding SMSF Residential Loans

Loan to value ratio can be up to 80%

Interests rates generally are about 2%-2.5% higher than traditional residential loans

Can be used to purchase house, townhouses and apartments

Can not be used to build a house (i.e. no progress payments allowed

Can not be used for vacant land

Legal and application costs generally range between $1,500 - $3,000

We recommend 60 days settlement for SMSF purchases, even though we have achieved < 10 days settlements on occasions

Servicing is met by using 80% of the rental income + the members’ employers guaranteed super contributions and salary sacrifice – the loan repayments at qualifying rate – SMSF running costs

SMSF loans are most often harder to service than normal loans

Most lenders now have post settlement liquidity requirements, which means that they are expecting your SMSF to hold a minimum amount of cash or shares after settlement. A few select lenders do not have such requirements.

Require a personal guarantee by the SMSF trustee(s)

SMSF Loan Refinance

If you're like most other SMSFs, you're forced to pay property loan interest rates between 6%-7%. Our groundbreaking SMSF loan refinance service can offer rates between 1% to 2% lower...

This means you save thousands and thousands in property loan repayments, making you wealthier (and happier) when you retire.

SMSF Loan Setup

When an SMSF is setup correctly with the right lending structure there are many advantages, including:

More control over your investments.

Access to wider investment options like property.

Greater tax incentives.

The opportunity to maximise returns so that you can reach your retirement goals faster.

Lower superannuation administration fees.

What’s a Limited Recourse Borrowing Arrangement?

Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), trustees of SMSFs are prohibited from borrowing except when borrowing under a limited recourse borrowing arrangement (LRBA). An LRBA is a loan to an SMSF for the purpose of acquiring an asset.

For protection against other retirement investments, LRBAs are non-recourse loans, which means the bank can’t come after your other SMSF assets if the fund defaults on the loan.

Understanding SMSF Commercial Loans

Can be used to purchase traditional commercial properties such as factories, warehouses, shops, and offices or more specialised securities such as breweries

Property can be leased to a related business

Commercial loans can’t be used for construction

The Loan-to-Value (LVR) rate and interest rate can vary significantly between lenders, typically 70%-80%

Servicing can be met with rental income only or rental income plus contributions

Consider any GST impact to your purchase when calculating available settlement funds

Application costs (including legal fees) generally range between 1% and 1.5%

Things to know before you borrow to invest in your SMSF:

The SMSF will need to hold sufficient assets to cover the associated risks such as interest rate volatility or a decrease in the value of the property. Commercial properties may also be trickier to sell.

It is the trustee’s responsibility to ensure the lending strategy is appropriate and that the SMSF meets all requirements. Strict lending criteria applies to all forms of SMSF lending. We can help guide you through this process.

Your loan may need to be refinanced should there be any change made to banking or SMSF legislation (a refinance could mean losing your attractive interest rate — it may also mean finding a better interest rate!).

The SMSF Trustee must ensure that the purpose of investment meets the Sole Purpose Test — that is, to ensure that the SMSF is maintained for the sole purpose of providing benefits to members upon their retirement.

Stamp Duty may apply, which might reduce your available funds to offer as security.

How much can my SMSF borrow?

The amount you can borrow depends on whether you are looking to purchase residential or commercial property.

Standard SMSF residential investment loans typically offer up to 80% of the property value.

If you’re looking to purchase commercial property, most lenders will allow you to borrow up to 75% for properties that are non-specialised.

Don’t let weak credit stop your SMSF Loan

Everyone deserves the right to a secure financial future. We provide solutions for those with poor credit ratings.

At SMSF Loans Experts, we offer lending solutions specially geared for clients affected by a low credit rating. Many lenders are extremely wary about lending to SMSFs with less than perfect credit scores, so we use our expertise to assess your situation and tailor a solution to help get you across the line. Depending on your circumstances, our team can explore the following SMSF lending solutions: 

“Massaging” your Self Managed Super Fund loan application through a prime lender at standard rates and fees.

Applying through a specialised SMSF lender while you work to improve your credit score.

Borrowing against your existing equity to lend to your SMSF.

We can assess your financial situation and find a solution to get you back on the right track through SMSF loans.

How to get approved for an SMSF loan despite having bad credit

If you want to get approved for an SMSF loan despite your bad credit rating, you’ll need to tell your lender how much the defaults were for, when they occurred and whether they’re now paid or unpaid. They’ll also like to know how long it’s been since you incurred a bad credit listing and how you’ve moved past the life event. The best way to make your case strong is by providing them with as much evidence as you can.