What Is SMSF Lending?

When it comes to being ready for retirement there are two types of Aussies, those that like to ‘set and forget’ their investments and those who take charge of their investment strategy. For those that want to take charge they will likely consider a self managed super fund as a likely course of action. 

Property is a popular investment option in Australia, and historically property has generated good returns over time so it can be a pretty easy decision for SMSF members to turn to property investment as a competitive assess in their portfolio. 

Not many investors can pay cash for a property though, particulary in areas like Melbourne and Sydney, so taking a mortgage to fund the purchase is usually necessary, and this can be facilitated through your SMSF with a self managed super fund loan. 

So what is our role in all of this? 

Firstly, it’s worth pointing out that JT Home Loans Pty Ltd are NOT financial advisors, however we work with a team of great professionals in this field and assist their clients with SMSF lending. We can provide a recommendation to an advisor or a range of advisors who will assist you with setting up your fund so that we can then help with lending within your new super fund. 

What is a self managed super fund home loan? 

Let’s go back to basics and understand how self-managed super fund home loans work. 

A self-managed super fund or SMSF is a type of fund where investments, insurance and high-level decisions are managed by those within the fund and this is different to a typical or standard superannuation fund. 

An SMSF home loan is a mortgage available to those within an SMSF for the purpose of purchasing property as an investment. SMSF borrowing can be approved for residential or commercial property and just as with any other loan you will need to meet loan repayments and be charged interest on top of those repayments. 

How do SMSF home loans work? 

In Australia there are strict regulations around what investment options you can choose for the SMSF and how the funds earned in your investment can be used. Your SMSF must pass the ‘sole purpose’ test to be eligible for super fund tax concessions. Basically, this means that the Australian Taxation Office have said your fund ‘needs to be maintained for the sole purpose of providing retirement benefits to the fund members, or their dependents if a member dies before retirement’. 

Please speak to your financial advisor or accountant for more information on this topic to ensure that this is the best investment strategy for you. 

If the SMSF trustees (fund members) agree to purchase property they will typically use funds available within the SMSF to pay a deposit and take out a home loan to purchase the property. 

There are rules and limitations around how a residential or commercial property can be used and you need to speak to your financial advisor or accountant to be sure of these and how they can affect your investment. 

An SMSF home loan is designed for a fund and its members to purchase a property as a form of long-term investment for retirement savings. 

It is NOT a good loan option for those looking to purchase their first home or purchase property to rent out and earn any pre-retirement benefits from. 

What do you need to apply for an SMSF home loan? 

The lending criteria for an SMSF home loan is much stricter than that of your standard mortgage. Funding providers must make sure that the purpose of the investment as outlined in the SMSF is considered safe, particularly over the long term. 

SMSF Loan Liquidity requirements: 

Lenders are required to check and make sure the SMSF has 10 – 20% of the property value in cash with the fund to ensure the fund has capacity to afford any unforeseen expenses after settlement. Things like repairs and maintenance of a property, legal expenses or loss of rental income. 

Loan Documentation: 

As with any loan, you will need to provide the bank or lender with documents to prove your SMSF is registered and compliant and can service the repayments on the property loan. This may include but is not limited to: 

A certified copy of the SMSF Trust Deed 

A certified copy of the Custodian Trust Deed 

2 years of SMSF Audited financial statements 

12 months of SMSF bank statements 

Rental Estimates 

Full copy of a contract of sale 

How much can you borrow with SMSF home loans? 

Depending on your bank or lender, the SMSF and its funds a standard SMSF investment loan will typically allow you to borrow up to 80% of the property value with the maximum value being determined by the lender of choice.