Smsf Loans And Property Investment

Better Loan Solutions in Mornington Peninsula • Learning Centre • Insights

SMSF Loans and Property Investment.

It would seem SMSF loans have become an increasingly popular way to access the capital required to get a foothold on the property ladder.

Why are SMSF loans so appealing?

Just as SMSFs offer the chance to take charge of your super, SMSF loans give you the opportunity and flexibility to enter Australia’s heated property market. Changes in superannuation laws mean SMSFs are now permitted to borrow money to buy residential or commercial real estate. This strategy is proving popular with small business owners. It also makes SMSF loans an attractive option for first home buyers who find themselves priced out of the residential property, as well as older folks looking to secure their retirement future with a “buy now and hold” approach. With a concessional tax rate of 15% in the accumulation phase and no tax in the pension phase, investing in SMSF property is arguably the best tax incentive around.

SMSF Related Party Loans vs. Third-Party Loans

Australians tend to be unaware of the advantages offered by related party loans, typically choosing the costlier option and engaging a third-party lender. Regardless of whether you choose a related party or third-party loan, or a combination of the two, it’s critical you structure the transaction in an efficient, timely, and compliant manner.

The PROs of SMSF Related Party Loans

Let’s start with the benefits of related party loans.

If you need capital, you can prop up your SMSF using the available equity on property owned outside of super rather than burdening yourself with a third-party loan. The advantages to you are reduced upfront expenses, like the application and legal fees charged by major bank lenders, which can run into the thousands.

Related party loans offer lower interest rates than third-party borrowing. The ATO now approves 0% interest rates for related party loans. That means you receive no taxable income from the arrangement and, consequently, incur no tax on the loan. Related party loans also involve less admin work.

Plus, you can hold the real estate until pension age and pay no tax on its capital growth.

Related party loans offer more flexible repayment terms, which are also easier to modify.

It enables you to get started in the real estate market if there are insufficient funds in your SMSF to buy a property outright.

An SMSF loan can help reduce your fund’s cash flow commitment.

Borrowing to buy property can help diversify your SMSF Investment Portfolio. The remaining funds can be put towards savings or directed to further diversifying your SMSF investment portfolio.

The CONs of SMSF Related Party Loans

As with all things financial, it’s imperative you also understand the disadvantages.

Structuring and drafting the legal deed can be expensive, so be sure to seek professional advice during this initial stage of the process.

There may be opportunity fees involved when allocating your cash outside super.

How much can you borrow?

Most lenders will restrict the loan amount for SMSFs looking to invest in real estate to a maximum of 80% of a residential property’s value and a maximum of 70% of a commercial property’s value. Note that product features will differ between lenders.

The exact amount is subject to serviceability (ability to pay for the loan) and your bank’s specific criteria for SMSF lending. Remember, it’s not only about securing the lowest rates but also about product features, such as an offset account.

The SMSF Related Party Loan process

Engage a professional financial advisor to help determine your SMSF’s borrowing power
Once your SMSF has identified a suitable piece of real estate, you appoint a trustee to purchase the property on your fund’s behalf. Your accountant can help with this.
Your professional financial advisor advises you on the optimal SMSF loan to meet your needs
A valuation is conducted, and the loan formally approved (subject to a satisfactory valuation)
A settlement is arranged, and the costs to finalise your property purchase are paid from your SMSF, including Stamp Duty, SMSF loan application fees, and legal fees.

Remember, SMSF loans may have a 30-year term, depending on the lender’s criteria. During this time, your real estate will hopefully appreciate in value with your repayments covered by your rent.

Case Study

Let’s say your SMSF has $100,000 in savings and you wish to buy a $350,000 SMSF property.

You could foreseeably be pre-approved for an SMSF loan of $280,000 at the 80% loan to value ratio (LVR). After you find an SMSF property and sign a contract of sale, the deposit of 10% or $35,000 will be paid from your SMSF.

Did you know?

With our in-house mortgage broking division we bridge the gap between the countless phone calls and emails between lender and accountant making your refinancing and borrowing much less stressful.

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We can help.

SMART Business Solutions is a registered financial services provider with a strong working knowledge of SMSFs. We are perfectly positioned to guide you through the SMSF loans process in collaboration with our in-house mortgage broker, selecting the most suitable lender for your needs, and buying an SMSF property.

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