A Guide to SMSF Home Loans
A self-managed super fund, or SMSF, puts you in the driver’s seat to determine how your retirement funds are invested. To help kick-start that investment, you may consider utilising an SMSF loan to use funds as a deposit and borrow the remaining amount required to fund a purchase. This is particularly the case for Aussies looking to take advantage of their SMSF to invest in property. Below we’ll dive into SMSF home loans, to identify what they are, how they work and the requirements needed to utilise your SMSF for property investment.
What is an SMSF home loan?
An SMSF loan is a home loan used by your SMSF to purchase an investment property. The returns on the investment, either capital gains or rental payments, are funnelled back into the superannuation fund for your retirement.
How do SMSF home loans differ from traditional home loans?
SMSF home loans differ significantly compared to traditional home loans in terms of how they are structured.
All SMSF loans must be undertaken through a limited recourse borrowing arrangement (LRBA). This means to limit the recourse of the lender, a separate trust and trustee, known as a custodian, must be set up to minimise risk to other assets within the fund.
Breaking this down, if the SMSF can no longer make repayments on the loan and falls into arrears, the lender will look to recover its losses by seizing assets. As the property is in a separate trust to the SMSF, the lender generally cannot pursue the assets within the SMSF and therefore, the assets are generally shielded from the risk of being repossessed by the lender.
Before entering into an LRBA, you should consider whether the asset you’re using it to purchase passes the sole purpose test, if the SMSF can handle interest rate rises and if the loan can be sold to another party.
In addition to purchasing property, you may be able to use borrowed cash from an LRBA to pay for repairs and maintenance in a property that is part of the SMSF.
Fewer financial institutions offer loan products for SMSFs these days due to their complexity. loans.com.au offers competitive rate SMSF home loans for the purchase of a new residential property, and the refinance of your existing SMSF loan. You can check out these options here or chat to one of our lending specialists to find out more.
SMSF home loan restrictions
Those looking to take advantage of an SMSF home loan to improve a property are unable to do so, with funds unable to be used for improvements such as additions, granny flats and extensions. However, you may be permitted to use borrowed cash in renovations where you are returning the fixture to a new condition, as this is classified as repairs.
What are the requirements of SMSF home loans?
When it comes to purchasing a property using an SMSF, there are a number of specific requirements an SMSF member must abide by before the property can be purchased. These include:
- A trustee or anyone related to the trustee, cannot live in a residential property that you have purchased through the SMSF.
- A trustee or anyone related to the trustee, cannot rent the property purchased through the SMSF.
- The SMSF cannot buy a property owned by a trustee or anyone related to the trustee.
- The purchase must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members.
For reference an SMSF can have up to six members, all of whom must be a trustee. This means that each member of the fund is equally responsible for decisions made about the fund and the fund’s compliance with relevant laws.
How much can an SMSF borrow?
Those looking to utilise an SMSF home loan to purchase a residential property typically require a loan-to-value ratio (LVR) of 80%. This means a 20% deposit is required. Commercial property loans through SMSFs are typically limited to a 70% loan-to-value ratio (LVR). This means a borrower would require a minimum deposit of 30%.
Why are SMSF loan interest rates higher than traditional home loans?
When comparing the interest rates on offer for SMSF home loans and traditional home loans, SMSF home loans will always be higher given the fact that limited recourse borrowing comes with a greater element of risk to the lender. The margin of this risk can vary significantly depending on whether the SMSF home loan is to be utilised for a residential or commercial property.
For the purpose of an SMSF, property is a non-liquid asset when compared to shares and is harder to sell, and access its total equity or value. Interest rates as a result are higher for SMSF loans, given property can be considered risky as it restricts the access of cash, which could see your fund fail the sole purpose test.
Can I get pre-approval on an SMSF loan?
Lenders will typically offer pre-approval like a traditional home loan for those seeking to take advantage of a SMSF home loan. At loans.com.au SMSF home loan pre-approval is completed through a phone appointment with one of our dedicated lending specialists. From there, customers can check loans.com.au’s onTrack app to receive final approval, mortgage documents and loan agreement.
Do SMSF loans offer fixed and variable rates?
Depending on the lender, SMSF home loans can be offered as either fixed or variable rate options. Here at loans.com.au SMSF home loans are offered as both fixed and variable rate options.
Check out the range of SMSF home loan options available here, or chat with one of our lending specialists today to help get you started.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
