Self Managed Superannuation Fund (SMSF) Residential Loans
It's quite common now to see client borrowing in the name of their self managed superannuation fund (SMSF) to enable them to purchase real estate, particularly apartments, within the superannuation fund. This is becoming popular due to various taxation benefits which may includes capital gains tax exemption on the property in the superannuation fund. It's important that you take advice from your lawyer, accountant and financial planner to check your suitability as mistakes can be costly.
Here at Omega Finance, we've financed a number of residential property purchases done this way. Unlike a business owner being able to sell their commercial property into their super fund, this is not possible with your own residential property. So you can only gain funding to buy an arms length residential property as an investment property and, it must not be used for owner occupation, until you reach retirement age.
SMSF lending requires a few more things to be in place for a transaction to be structured. Firstly, the SMSF has to be established and your financial planner or accountant can help with this. It's normally wise to have a corporate trustee for the SMSF as it makes future changes to members of the fund easy. If you are switching from company or industry super funds and setting up a new SMSF, allow your financial planner at least one month for this to take place. Secondly, you'll need to set up a holding trust called a "Bare Trust ". Essentially, it's a special type of trust set up with another corporate trustee to hold the title to the property on behalf of the SMSF, until the loan is repaid.
The loan is made to the super fund and the "Bare Trust" which holds the title, provides a guarantee to the lender. Any deposit must be paid from the super fund. The rental under the terms of the lease or tenancy is paid to the super fund together with the usual members contributions. The super fund is responsible for making the loan repayments out of the rental income and members contributions. Once the loan is fully repaid, the title is transferred into the super fund. As you can see the set up is a little more complicated than normal so the cost to establish these could be around $4-6,000. If you are paying a deposit, it has to come from the funds of the SMSF, so you need to plan early, and have one set up if one isn't in place already.Take a look below to see how this is structured in practice:
Here at Omega Finance, we've financed a number of residential property purchases done this way. Unlike a business owner being able to sell their commercial property into their super fund, this is not possible with your own residential property. So you can only gain funding to buy an arms length residential property as an investment property and, it must not be used for owner occupation, until you reach retirement age.
SMSF lending requires a few more things to be in place for a transaction to be structured. Firstly, the SMSF has to be established and your financial planner or accountant can help with this. It's normally wise to have a corporate trustee for the SMSF as it makes future changes to members of the fund easy. If you are switching from company or industry super funds and setting up a new SMSF, allow your financial planner at least one month for this to take place. Secondly, you'll need to set up a holding trust called a "Bare Trust ". Essentially, it's a special type of trust set up with another corporate trustee to hold the title to the property on behalf of the SMSF, until the loan is repaid.
The loan is made to the super fund and the "Bare Trust" which holds the title, provides a guarantee to the lender. Any deposit must be paid from the super fund. The rental under the terms of the lease or tenancy is paid to the super fund together with the usual members contributions. The super fund is responsible for making the loan repayments out of the rental income and members contributions. Once the loan is fully repaid, the title is transferred into the super fund. As you can see the set up is a little more complicated than normal so the cost to establish these could be around $4-6,000. If you are paying a deposit, it has to come from the funds of the SMSF, so you need to plan early, and have one set up if one isn't in place already.Take a look below to see how this is structured in practice:
As a general guide, you need to have a minimum of $200,000 in your super fund to get started. We can source finance up to 80% for a purchase or refinance (simple debt swap - no increase). Don't forget you'll need to pay stamp duty. Click here to be taken to our calculator page to work out your stamp duty and get an idea of your level of repayments which are normally geared to a 25-30 year term.
You should know that there are some restrictions on what you can do with SMSF lending. If you purchase land or a property in your super fund with borrowing, then you can't borrow to build on that land/property. You can maintain, repair or restore but not improve the property nor change the nature of the property so usually construction projects are out of the question. Also, if you start paying down your loan in your super fund, you cannot access the equity you have built up , other than selling your property. This differs from normal property lending where you could get the property revalued and potentially re-lend /capital raise against it. You can sell the property as per normal. Additionally, you can't cross secure properties in your super fund for other loans, it's one property per loan only. It is crucial that you take professional advice from your advisors to ensure that this is an appropriate avenue to take for you.
We have expertise in this complex area and can work with your advisors to project manage this for you to put the necessary funding in place. We have very close working relationships with financial planners, lawyers, SMSF set up agents and accountants who specialise in this rapidly growing area. We will be happy to introduce you to experts to assist you with this, if you don't have the necessary contacts.
We have expertise in this complex area and can work with your advisors to project manage this for you to put the necessary funding in place. We have very close working relationships with financial planners, lawyers, SMSF set up agents and accountants who specialise in this rapidly growing area. We will be happy to introduce you to experts to assist you with this, if you don't have the necessary contacts.
