Successful Processing for Self-Managed Super Fund Borrowing
Property Investment with Borrowing
The rules and regulations for setting up and borrowing through a SMSF are complex, however by working alongside Digital Financial Services, which is located in Wangara, Perth, Western Australia, we have successfully processed a significant number of these applications.
As with all investments, whether it is within a SMSF or outside, the quality of the investment is of up most importance. If an investment is made within a SMSF it is essential that the SMSF's portfolio is balanced and that the only asset within the fund is not just the property being purchased.
With borrowing within a SMSF, whether it is property or other assets, it is essential that you get professional advice before making the commitment, as there are numerous risks involved in making such as investment.
Apply for Self-Managed Super Fund Loans
The steps that must be followed are:
Review your SMSF documentation
If you already have a SMSF, you’ll need to make sure you have the necessary powers to borrow under your fund. This review is normally completed by a lawyer who specialises in SMSFs.
Set up a separate security trust.
The first step to purchasing an investment property through your SMSF is setting up a separate security trust on behalf of your SMSF. This new security trust will buy and hold the property, and provide a guarantee for your loan.
Loans to SMSFs are “limited recourse loans”. This means that if you default the bank can only access:
the investment property
any other property securing the loan
The bank won’t be able to access your other super assets.
This step must be completed before any offer and acceptance is made as it has implications for stamp duty.
Like regular property investment, you’ll need a deposit from your self-managed super fund, and a loan to cover the difference. You’ll need to take into consideration how much the bank will lend you, and how much you’re SMSF will need to provide. The conditions under which the banks may lend money to your SMSF vary from time to time and you should check with your broker or bank on what the current position may be.
The security trust buys and holds the property on trust for your SMSF.
Rent payments flow through to your SMSF and can help pay off the loan. If this rent doesn’t completely cover your loan repayments, the extra needs to come from your SMSF. If you are maximizing your annual contributions into super, as part of your tax planning, these additional funds can be then used to pay off the loan. This strategy will have significant impact on the time it takes to pay off the loan.
You’ll need to consider your cash flow when thinking about this investment type. Once your loan is fully repaid, the property can be transferred from the security trust to your SMSF.
The team at Digital Financial Services are able to give you further advice on this matter by contacting them on (08) 9306 4842.