An SMSF loan is a loan taken out by a self-managed super fund to purchase an investment property. The investment returns such as rental income or capital gains are filtered back into the super fund, thus boosting your retirement nest egg.

If you are considering applying for an SMSF loan, here is an ultimate guide to SMSF loans to facilitate your application process.

How Much Can You Borrow?

The amount you can borrow will depend on your circumstances, here are some typical examples:

• Standard SMSF loans: Maximum 80% of the overall property value. Most often lenders will offer you 70% of the property value.
• Commercial property/business premises: Maximum 75% of the property
• No documentation: These are called SMSF low doc loans, the amount you can apply for will vary according on the lender, but these loans are often difficult to acquire and can be restrictive.
• Bad Credit: SMSF bad credit loans are available, again it depends on the lender you choose to go with. You might be able to get 80% of the property value for residential property and a maximum of 70% for a commercial property.
• Specialist SMSF loans do exist for those who have unconventional income types.
• Rates and eligibility will depend mainly on the lender you choose.

When Is An SMSF Allowed To Borrow Money?

There are specific laws, restrictions, and criteria that an SMSF must adhere to when borrowing money. Here are some of the rules associated with SMSF borrowing:

• The SMSF could purchase the asset if it had the money to do so
• The asset is secured for the SMSF using a security trust or custodian
• The SMSF is allowed to gain legal title from the security custodian when all payments are made
• The lender can only have access to one specific asset. Therefore, in case of late repayments, the lender can only claim one particular asset.
• An SMSF loan can only be used for a single acquirable asset

Note: You should begin your SMSF loan application at least two weeks before you start searching for a property.

Bank Assessment

The bank assessment process will require you to provide proof of the self-managed super fund income. The bank will expect you to provide at least two years of income proof; they will then look at your expected rental income to determine whether or not you qualify for the loan. Some lenders will accept a personal guarantee plus income proof from fund members if necessary.

Lending Restrictions

Here are some of the restrictions that exist for SMSF loans:

•  Loans are not available for construction purposes
• Loan refinancing is generally not allowed. However, some lenders will offer this
• Purchasing a property to live in is not permitted, however, you can utilize a commercial property
• Offloading a residential property to the SMSF that is owned by you or one of the fund members is not permitted. However, this is possible for commercial properties.
• There are liquidity requirements for some lenders but not all.

Note: Seeking professional financial advice before applying for an SMSF loan is advisable.

Lower Interest Rates When Lending To The Bare Trust

Most SMSF loan agreements  lend funds to the trustee who does not own the property. Some lenders will lend to the trustee of the bare trust. Therefore, you can enjoy lower interest rates, in which case an agreement would have to be made between the SMSF trustee and the trustee of the bare trust.

The bare trust trustee should also be director of a company.

Do Banks Lend To Super Funds?

Most major banks do not offer SMSF loans, because this type of loan is relatively new. Therefore, processing the loan application requires more work for the lending bank. Certain lenders will offer SMSF loans, to find the best option for you, seek the advice of an experienced financial advisor who specializes in this type of lending.

Structure Of The Loan

The loan is signed over to the trustee of the super fund; the security custodian will act as the mortgagor.

The lender has limited access to assets; therefore if payments are late, the lender can only access one specific asset.

Some, not all lenders ask for a guarantee from all the members of the trust

If you borrow 60% or less of the property value, most lenders will not require personal guarantees, especially if the super fund has a large balance.

No Deposit SMSF Loans?

Do zero deposit SMSF loans exist? To apply for and be approved for an SMSF loan you need at least 24% of the purchase price of the property to go towards your 20% deposit, stamp duty, and other expenses. If you have funds in an existing super fund, you can transfer these funds to pay your deposit. Therefore, it is not necessary to have a deposit in your own name to purchase a property using an SMSF loan.

Do Lenders Assess The Beneficiaries?

Depending on the lender, some might assess the income of the beneficiaries especially if it is a relatively new fund. The loan can often be evaluated by using estimated contributions to the fund; lenders will also check the affordability of the repayments.

Can My SMSF Purchase  Property From My Personal Portfolio?

Your SMSF cannot purchase a property that is owned by you or any of the fund members. However, it is possible to buy a commercial property that is owned by members of the SMSF. This guideline should be strictly adhered to as significant  penalties will be imposed if you do violate this rule.

How To Apply For an SMSF Loan?

Some lenders and mortgage brokers specialize in providing loans to SMSF customers. Speaking with a qualified financial expert regarding your SMSF loan is advisable, they will be able to point you in the right direction and guide you through the SMSF loan application process. Ensuring all your documentation is in order and you are aware of all the legal jargon associated with purchasing property using an SMSF loan.

More on Borrowing and Lending

Single Acquirable Asset Rule

You cannot use one SMSF loan to buy multiple assets. When an SMSF takes out a loan, the loan should be for one sole purpose. For example, purchasing a house and land package using one SMSF loan is not allowed. The land is recognized as one asset, and the house component would also be recognized as one asset. When purchasing a house and land package, the house is yet to be constructed the majority of the time. Therefore, construction of property would require multiple contractual agreements, meaning it does not fall into the category of a single acquirable asset.

No Non-Compliant Related Party Loans

Related party loans are not permitted, particularly when it comes to purchasing residential properties. Related party loans can, however, be used for acquiring commercial assets, in which case the single acquirable asset rule applies.

Limited Recourse Borrowing

Members can lend money to the fund to purchase a property. Nonetheless, this has to take place with a limited recourse borrowing arrangement. Members provide the cash as part payment for the property. Usually, around 20% and the bank or financial institution lends the rest of the money.

Ownership

The bare trust owns the property, the SMSF has a beneficial entitlement to the property. When all repayments of the loan have been paid, the SMSF can then claim legal ownership of the property. The SMSF has to be established before the bare trust can be formed. The SMSF must have sufficient income to make the loan repayments.