When it comes to using your SMSF to borrow, things can get a little complicated. These types of loans may just be the most complex type of lending that you’ll ever do. There are many interested parties, such as the bank, broker, solicitor, accountant and financial adviser just to name a few. Because of the level of intricacy involved in these transactions there are many moving parts. Get one bit wrong, and it can affect the whole process.
I've compiled a list of five of the problems that can arise and my recommendations on how to overcome them or avoid them all together.
1. Starting out
So you understand the process and may have even had advice on the strategy – but when it comes to the borrowing part, you don’t know where to start.
If you are completely sure that borrowing to buy property with your fund is what you want to do, you should start (even before the fund is set up) by finding out what your future SMSF’s potential to borrow would be.
Using your super history from your retail funds (or if your fund is set up history from it), an experienced lender will be able to do an assessment as to the borrowing eligibility of your SMSF.
This should confirm your plan and give you confidence to move forward and invest the time and money in setting up your fund as it is likely it will be able to borrow and fit lenders’ criteria.
Conversely, if your fund won’t be in a position to borrow, it can clearly highlight what you would need to do to set this up as a strategy for the future and give you a time frame around when it would be able to happen.
2. Buying a new property with my super fund
Lending to super is still relatively new. It’s only been a product with banks since around 2008. This makes it hard for a bank to assess the risk of this type of lending. Traditionally a bank can look at its 'back book' or existing customers to predict risk and assess any trends with certain types of lending. This can’t be done with SMSF lending just yet – they don’t have enough data.
Therefore banks will use other factors to predict the risk associated. New properties have been singled out by some lenders as potentially being a security that they would like to limit to SMSF borrowers. This is due to many different factors.
My personal opinion on this is, that there has been some controversy surrounding property spruikers or marketeers pushing people to open SMSFs to buy property, specifically new ones. In some cases these properties have had overinflated prices and/or didn’t represent sound buying to a long-term investor. I believe that lenders who have chosen not to accept new property are trying to limit their exposure to this type of activity.
Generally speaking, properties in a metropolitan location in a state of good repair are OK. They will of course be always subject to a full valuation by a panel valuer appointed by the bank.
Regional properties, those located in a mining town or a specialised property (one that is unique to the area or has attributes that would make it hard for a bank to realise its value if they had to sell it) will also attract a higher level of scrutiny or may not be acceptable at all.
Remember, a property must be on one acquirable title to be suitable for an SMSF Loan. Beware of units with car parks on separate title or properties sold complete with furniture packages (the furniture is considered a separate asset).
Special note for off-the-plan properties
Nothing says that you cannot purchase a property that is not yet completed or is off the plan. But, a great level of caution must be taken if you want to make this type purchase in your SMSF and using borrowed funds.
Obtaining finance for a property that is due to complete in more than 30 to 60 days has an extra layer of complexity and must not be taken lightly.
3. Getting over extra hurdles if you are self-employed
When it comes to SMSF lending there are only certain types of income we can look at to show that your fund is able to borrow. They are (in most situations) historical contributions, rent and return on any other investments in the fund.
Without meaning to generalise, self-employed people are often focused on growing their business as an asset for retirement rather than focusing on contributing to super.
So when it comes to borrowing if there is not a great track record of contributions being made, it can make it tough for the SMSF to borrow.
There is a work around with some lenders. If you can show that your business and you personally, had the capacity to make contributions this can be acceptable. The key is to ensure you have had advice about this plan and make sure that you actually make the contributions to the fund going forward.
4. How do I know the real costs of borrowing upfront?
It can be hard to determine how much buying a property in super will actually cost your fund. There are several fees involved in the transaction over and above the loan itself.
These can include:
- Lender application fees
- Valuation fees
- Lender’s solicitors fees (you have to pay these)
- Legal/conveyancing fees for the transaction (yours)
- Independent legal advice for guarantees
- Stamp duty and compulsory charges such as title registration
As I covered in the first point, getting an accurate picture of what your fund can borrow upfront should include all the costs association so you have a better idea of what the purchase will cost your fund. These costs will be specific to the property you choose and it’s location.
5. My bank will lend to me but not my SMSF. What do I do?
Don’t feel bad! The SMSF lending landscape changes regularly. In 2015 we saw the impact of APRA, the banking regulator, tighten its policy with investment lending. This hit the SMSF lending space the hardest.
What resulted was lenders changing policy and products to control the amount of lending they will do in this space.
So, even though you may be a stellar customer of the bank (and even did your school banking with them), their current appetite may not allow them to lend to your super fund.
In this case I would encourage you to speak to a specialist in SMSF lending that has access to a wide variety of lenders they can deal with.
This will give them the ability to find the bank that fits your SMSF’s lending needs and will ensure that in turn, your fund fits their appetite.
Samantha Bright, director, Thrive Investment Finance.