SMSF property loans, arranged properly

We write these ourselves

Worth saying early, because a lot of brokers do not. SMSF lending is a specialist product with a much smaller lender panel and a lot of structural detail that has to be right before you sign anything, so plenty of brokers take the enquiry and pass it to someone else. We write them ourselves, start to finish, and deal with your accountant directly rather than through a third party.

Where our job stops

This matters more than anything else on the page, so it goes near the top.

Arranging the loan for an SMSF that already exists is credit work, and it is what a finance broker is for. Advising you to set up an SMSF, or to move your superannuation into one so that you can buy a property, is financial product advice. That requires an Australian Financial Services Licence. We hold a credit authorisation, not an AFSL, and the two are not interchangeable.

ASIC has been pointed about this. A broker who suggests you start an SMSF in order to afford a property is doing something they are not licensed to do, and the fact that it happens in this industry is exactly why we are spelling it out.

How borrowing inside super actually works

An SMSF cannot simply take out a normal mortgage. The structure is a limited recourse borrowing arrangement, and it has a few moving parts.

• A separate holding trust, sometimes called a bare trust, owns the property while the loan is outstanding. The fund holds the beneficial interest.
• The lender's recourse is limited to that one property. If things go wrong, the rest of the fund's assets are not on the line, which is the whole point of the structure and also why lenders price these loans more conservatively.
• Once the loan is repaid, the property transfers to the fund itself.
• One loan, one asset. You cannot cross-collateralise SMSF loans the way you might with personal investment properties.

Most lenders will want the fund to have a corporate trustee rather than individual trustees. There are good reasons for that on the super side, and one on the lending side as well: a loan to a corporate trustee generally sits outside the consumer credit regime, which is how the lending is structured.

What lenders typically want to see

SMSF lending is a specialist product and the requirements are meaningfully tighter than a standard investment loan. As a general guide, and every lender's policy differs:

• A larger deposit than you would need outside super, commonly in the range of 20% to 30% of the purchase price.
• A liquidity buffer left in the fund after settlement, so the fund can cover repayments, insurance, rates and running costs if the property sits vacant for a while.
• Servicing built from the rent plus the fund's ongoing concessional contributions, not your personal income.
• A clean, properly documented fund. Current trust deed, current financials, an audit history, and a holding trust that is set up correctly before the contract is signed.
• Rates that sit above standard residential lending, because of the limited recourse structure.

The panel of lenders writing SMSF loans is much smaller than the panel for an ordinary home loan, and policies vary widely on things like minimum fund balance, acceptable property types and whether they will lend to a fund with a single member. That is why it pays to have someone match the fund to the right lender instead of approaching one at random. It is also why a broker who actually writes these loans is worth more here than on a standard home loan.

The rules that catch people out

These are superannuation rules rather than lending rules, so your accountant is the authority on all of them. They come up constantly, so they are worth knowing before you start looking at properties.

• Residential property bought by your fund cannot be lived in or rented by you, your family or any related party. Not at market rent, not at all. This is the one that surprises people most.
• Commercial property is different. Business real property can be leased back to your own business, provided it is on genuine market terms and properly documented. For a lot of small business owners this is the more useful version of the whole idea.
• You cannot improve the property with borrowed money. Repairs and maintenance are fine. Renovations and improvements that change the character of the asset are not, while the borrowing is in place.
• The holding trust has to exist before you sign the contract and the contract has to be in the right name. Getting this wrong after the fact is expensive and sometimes cannot be fixed.

Who this suits, and who it does not

It tends to work for funds with a reasonable balance already, a stable contribution pattern, members who are some years from retirement, and a clear reason for holding property inside super rather than outside it. Business owners buying their own premises are the clearest case.

It tends not to work for small balances, funds without a liquidity buffer, or anyone whose main motivation is that they cannot afford a property in their own name. If that is the situation, borrowing inside super is very rarely the answer, and there are other routes worth looking at first, including the government schemes on this page.

The legal details

This page is general information only. It is not financial product advice, superannuation advice, tax advice or legal advice, and it does not take your objectives, financial situation or needs into account. Decisions about establishing or running a self managed super fund, and about whether an SMSF should hold property, should be made with a licensed financial adviser and your accountant. Exceed Finance Pty Ltd (ACN 618 917 918) is a Credit Representative (000499740) of Connective Credit Services Pty Ltd, Australian Credit Licence 389328. Lending criteria, fees, charges, terms and conditions apply.