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Self-Managed Superannuation Fund (SMSF) Loans – A Quick Guide

SMSF Loans – have you ever thought about setting up a Self-Managed Superannuation Fund (SMSF) to secure a loan? Maybe you have a SMSF in place and want to know what your options are. In either case, read on! In this article, we’ll be looking at how to make an informed decision about the appropriateness of securing finance through your SMSF – including the reasons why trustees may choose to borrow money through their SMSF, Limited Recourse Borrowing Arrangements (LRBAs), structural considerations, and typical finance options.

SMSF Loans – An Overview

If you have a Self-Managed Superannuation Fund (SMSF), there are a few reasons why you might want to use it to secure finance. Borrowing from your SMSF affords you the opportunity to diversify your investment portfolio, for instance through purchasing a block of shares, or an investment property. There are also tax incentives, particularly the 15% concessional rate at which SMSF earnings are taxed – representing significant savings compared to holding the property as an individual. There are a few other key considerations when deciding if SMSF loans are appropriate for you, outlined below.

Limited Recourse Borrowing Arrangements (LRBAs) & Bare Trusts

Generally speaking, SMSF trustees are prohibited from borrowing money, subject to limited exceptions under the super law. One key exception is for limited recourse borrowing arrangements (LRBAs), where a SMSF trustee takes out a loan from a third-party lender, and then uses those funds to purchase a single asset to be held in a separate trust. To take advantage of this exception, a bare trust with a corporate trustee is established – a bare trust being where the trustee’s duty is to hold property on behalf of the beneficiary.

LRBAs are important as if the loan defaults, the lender’s rights are limited to the asset held in the separate trust. In other words, a bank cannot get their hands on other assets in your super fund if the loan defaults, their only recourse is with the property itself.

Securing Finance Through Your SMSF

As is the case with purchasing property outside of a SMSF, securing loans through your fund requires some shopping around – particularly as the rates and facilities on offer will differ between lenders. Engaging a finance broker is a good first move, to ensure you’re getting the deal best suited to your needs.

Both residential and commercial properties can be purchased with a loan through your SMSF. For most lenders in the market, up to 80% of the property’s value can be borrowed (some will allow up to 90% for residential only), and interest rates increase from lower loan-to-value ratios (LVR) of less than 50%, up to 80%. Many lenders offer Principal & Interest (P&I) and Interest-Only (IO) repayments, however IO repayments will typically be offered at a lower LVR and attract an interest loading. For instance, a bank might allow an IO loan through an SMSF, with a maximum LVR of 75% and 0.4% interest loading. Fixed and variable rates are also available, and some lenders offering an offset facility at a slightly increased interest rate (typically around +.20%).

SMSF Loans – Serviceability

SMSF loan can be offered to clients on PAYG or self-employed incomes with serviceability calculations generally using the following:

1. Previous two years’ SGC (Superannuation Guarantee contributions);
2. Expected rental income on property to be purchased;
3. A pre-determined yield of, for example, 4% on the remaining funds held in the SMSF after the property purchase.

Some lenders may also require a minimum amount to remain in the SMSF after the property purchase is completed, as a liquidity test.

How McKinley Plowman Can Help

As you can see, there are several potential benefits to securing finance through your SMSF, particularly to buy property, but also a number of stipulations and hurdles to clear before you can make it happen. Additionally, SMSF borrowing is not appropriate for everyone. Before establishing a SMSF and exploring finance options, speak first to your financial adviser and a SMSF specialist to determine whether it is right for your financial circumstances and goals.

McKinley Plowman’s coordinated, integrated service offering allows us to take care of all stages of your SMSF lending journey. Our financial advisers can ascertain the appropriateness of these investments within your financial plan, our SMSF team establish the necessary structures (including the fund itself, as well as a bare trust as required), and the Finance team can then do the legwork for you in finding the best loan facilities for your needs.

To see how we can help you, please reach out to the team on 08 9325 2411 (Perth), 08 9301 2200 (Joondalup), or contact us via our website.

Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.

(You’ll find further information regarding LRBAs on the ATO Website here)

written by:

Jojo Rollerson

With her career in accounting spanning nearly two decades, Jojo brings to the MP+ Self-Managed Superannuation team extensive industry experience and a passion for industry-leading SMSF Services. Jojo and her team of accounting professionals manage clients’ self-managed superannuation fund affairs so they have the time to enjoy the things they would rather be doing! She enjoys giving clients peace of mind that their super is in the right hands, and has an excellent track record in turning complex superannuation situations into fantastic outcomes for her clients.

Outside of the office, Jojo loves travel, food, cooking, reading, movies, and a nice walk.