SMSF Bank Loans
An SMSF Bank Loan also know as a Limited Recourse SMSF Borrowing Arrangement is a type of facility used by an SMSF to borrow money. This type of arrangement is an exception to the prohibition on SMSF borrowings.
At Superannuation Warehouse we can assist with executing a Limited Recourse SMSF Borrowing Arrangement in order to keep your Fund compliant. Please ensure that your Trust Deed and Investment Strategy allow for the investments that will be purchased through the borrowing.
Limited Recourse SMSF Borrowing Arrangement
If the SMSF has sufficient funds to put down a deposit, the remainder of the purchase price can be borrowed. The SMSF can borrow either from a financial institution (a bank or a credit union for example), or from the Fund’s Members.
Loans are set up with non-recourse borrowing arrangements. This means the lender has no right of recourse on any other assets in the SMSF. For this reason, the lender (the bank) will ask the Members for a guarantee. This arrangement is generally referred to as a limited recourse borrowing arrangement.
The SMSF provides the funds for a partial payment on the property and pays all the relevant fees. The SMSF will borrow to settle the balance.
If the SMSF pays a larger deposit on the investment property, the bank may waive its requirement for security from the Trustees. The property will be the sole security for the loan under this limited recourse loan agreement. In the event of default, the lender only has the right of recourse on the property; there is no right of recourse on other assets held in the SMSF.
As a general rule-of-thumb, if the bank is lending 80% of a residential property’s value, it will ask the trustees for a guarantee. The bank will not normally ask for a guarantee when the loan-to-value rate is 60%. For commercial property, these percentages are 70% and 50% respectively. In assessing the need for a guarantee, the bank will take into account the condition of the property, the credit history of the borrower, and the expected income from rental.
When an investment property is owned by a Bare Trust, the SMSF will be the ultimate owner. The Bare Trust is merely the title holder until the loan is paid off. The SMSF will receive lease payments from the lessee. Interest paid by the SMSF will be accounted for as an expense for the SMSF.
After the loan is repaid, the SMSF has the right, but not the obligation to acquire the legal ownership of the investment property.
Once the loan under a Limited Recourse Borrowing Arrangement (LRBA) is repaid, the SMSF Trustee has two options:
- The property can remain under the Bare Trust
- The legal ownership of the property can be transferred from Bare Trust to the SMSF
The Trustees should be mindful of certain restrictions if the property remains under the Bare Trust arrangement. No fundamental changes to the character of the property is allowed as long as the property is under the Bare Trust.
There has been recent guidance from regulators regarding what happens to property ownership when the loan is paid off. To view this legislation, click here.
When purchasing a residential property, the SMSF is forbidden from having any dealings with a related party. This means that members of the Fund cannot sell their own houses to the SMSF. The Fund is also forbidden from renting the property to a Trustee, a family member, or a parent-in-law. Trustees can, however, purchase the property from the SMSF when entering the pension phase.
Benefits of purchasing property in your SMSF
- commercial property owned by you can be sold by the SMSF at market rates;
- assets in the SMSF are secure because the lender only has the right of recourse on the investment property, plus any additional security provided by the guarantor;
- the loan is repaid using super contributions and rental income;
- the SMSF is only taxed at the net income after loan interest and expenses have been deducted against the rental income;
- the SMSF is only taxed at a rate of 15% compared to marginal rates if the property was purchased in a personal capacity; and
- capital gains will only be taxed at a rate of between 0% – 15%.
Things to consider
- the SMSF must be set up before the bare trust and corporate trustee can be established;
- the bare trust and corporate trustee are mere title holders of the property and all transactions will occur within the SMSF;
- the trust deed provided by Superannuation Warehouse will allow for borrowing;
- the investment strategy of the SMSF should include provision for property investment;
- the SMSF will require sufficient cash flows to service the loan. This can come from rental incomes, investment earnings and members’ contributions;
- all transactions must be carried out at arm’s length and at market rates; and
- buying a holiday property in your SMSF and then using it for yourself is strictly forbidden.
All investment purchases should pass the sole purpose test.
Bank and Broker Information
You are free to use any bank or lender when arranging finance for your SMSF property purchase. To get the best deal possible, you’d be well advised to use a mortgage broker. You can use a big bank or one of the niche players like Macquarie who, by the way, have a very informative free brochure with some great examples. You can also download a cash flow analysis brochure here which gives examples on the cash flow details of an property with a limited recourse borrowing arrangement in place.
Trustees can contact Steve Gilbert from Gilbert Financial Advice & Services or Robert Sestan from Park Road Finance for more information. Their contact details are noted below:
Steve Gilbert (Gilbert Financial Advice & Services)
SMSF lending at times seems complicated and expensive. Certainly most banks and especially Mortgage Brokers do not understand the lending process that is required for SMSF’s. This leads to frustration and potential loss on retirement funds. Higher interest rates and fees can also mean less for your retirement. Also, wading through the rules, regulations and limits of borrowing capacities can be hard to navigate. At GFAS we have Mortgage Brokers that are specialised in this area who work with Financial Advisers. Our team will work on solutions that are specific for your requirements and that can mean some very big potential savings for you. Our service will make the process simpler as we work with all parties: accountants, lenders, brokers and investors to achieve the outcome for you. We use four main strategies and a full suite of products that are not available to all brokers. In short we offer a succinct and precise service, tailored strategies and a large suite of lending products to achieve your retirement goal. We also assist with other related lending as well.
Enquire to Steve Gilbert on 0412 209595 for a no obligation and no fee initial review, so we can place you with a specialist Broker that suits your needs.
Robert Sestan (Park Road Finance)
Thankyou for your interest in seeking finance to purchase or refinance, residential or commercial property, for your SMSF. Why SMSF Lending with Park Road Finance:
- One-Stop Shop for your SMSF lending requirements
- Secure Factfind information and document gathering
- Fully assess borrowing capacity for SMSF, whether for refinance or purchase
- Extensive panel of 12 lenders, provides you with choice and ensures you are matched with lender that best fits your requirements and objectives
- Lend to either residential or commercial property
- LVR (Loan to Value ratio) upto 90% for residential and 80% for commercial
- Rates starting from 6.93%
- We are associated with Superannuation Warehouse, SMSF administrator, to assist with setup Bare Trust if required, and assist with your annual SMSF compliance requirements
- Most importantly, will be with you from start to finish.
For further information or a no obligation meeting please contact Robert Sestan – Park Road Finance on 0410514887 or email@example.com
ATO Guidance on Borrowing
The ATO’s ruling on borrowing can be viewed by clicking the link below.
The property details and other information we need from you before we can start setting up your Bare Trust can be found by clicking here.
Q: Can an SMSF borrow to build a house on a vacant land owned by the Fund?
A: An SMSF cannot borrow to build a house on a vacant land owned by the SMSF because a Bare Trust can only hold a single acquirable asset. Building on a vacant land will result in multiple titles. Additionally, it would also give a charge over an existing asset which is the vacant land. This is a breach of the LRBA clause and will result in a contravention. See here for ATO guidance.