Your guide to SMSF property lending
11 Jan 2023
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With Self-Managed Super Funds (SMSFs) on the rise, more Australians are choosing to invest their retirement savings into property than ever before. With the right guidance and support, brokers can unlock more options for their SMSF clients – and grow their own business.
Property makes up 25% of the assets of the 600,000 Self-Managed Super Funds (SMSFs) in Australia, according to ATO figures. And it’s growing. Total investment in SMSF property rose to $157.2 billion in 2019-20 and is set to increase in the future as more Australians look to tap into the benefits of property investment to boost their retirement income.
For brokers, this brings opportunities to tap into a growing market and diversify their client base. And for those with existing clients who are looking for SMSF solutions, there’s potential to build stronger long-term relationships and increase client retention.
Here’s what you need to know about SMSF property lending.
Market conditions are attracting more SMSF property investment
Currently, falling house prices and rising rental returns are bringing greater opportunities for SMSF property investors. There are also tax benefits associated with SMSF property investment, including a reduction in capital gains tax – making it an appealing option for many Australians.
While SMSF legislation prevents residential property investors living in their SMSF properties, or deriving any personal benefit from them, the same is not true for commercial property. Many business owners choose to buy their commercial premises through their SMSF and rent it back to themselves. This lets them tap into the tax benefits of SMSF property investment, while providing greater control and stability over their business premises. With their premises owned and paid off by their super fund, they can also free up cash flow and use it to reinvest in the business or pay off their personal mortgage.
SMSF property loan options are limited – but more are opening up
Lending to SMSFs is complex and highly regulated. And non-compliance can come with hefty penalties. Because of the strict legislation around SMSF borrowing, there aren’t many SMSF mortgages available on the market. But some lenders do provide SMSF finance – including Assetline Capital with their SMSF Horizon Mortgage. Look for a lender that offers commercial as well as residential SMSF property loans, with alt-doc and full-doc options to give borrowers more options to prove income.
Because SMSF lending can be complicated, it’s also a good idea to partner with an experienced lender that offers a high level of support and can guide you and your clients through the process of getting a SMSF loan.
What lenders are looking for when they lend to a SMSF
When SMSFs invest in commercial or residential property, it’s purchased by the fund and repaid through rental income and superannuation contributions. There are a few criteria borrowers will need to meet to be eligible for a SMSF loan. While requirements vary considerably between lenders, they include:
Minimum SMSF balance: Borrowers need to have a certain number of assets in their super. For our SMSF Horizon Mortgage it’s $250,000, but the amount varies between lenders.
Super fund income: Income assessment and serviceability checks need to be undertaken for a SMSF mortgage to show the fund’s ability to repay the loan. This can be done through the applicants’ PAYG income or two years lodged SMSF tax returns.
LVR requirements: Different LVR limits may apply depending on the lender and their individual policies. For example, the LVR limit for an SMSF Horizon Mortgage is 80% for residential and 65% for commercial property.
SMSF structure: Your client’s SMSF structure will need to comply with relevant ATO and ASIC requirements to be eligible for a SMSF loan. The SMSF investment strategy will also need be set up to allow direct property investing and borrowing.
The property they are planning to purchase: The lender will assess the property’s value, income and location to determine whether it’s eligible. When borrowing for residential property through an SMSF, the borrower can’t live in the property, purchase vacant land for development or rent to friends, family or associates. The rules are slightly different for commercial property as the borrower’s business can occupy the property as a tenant.
If you’re looking for a SMSF property loan, Assetline Capital can help
If you’re keen to diversify into SMSF property solutions, or you have clients currently looking to invest in commercial or residential property through their super fund, we can help. Our SMSF Horizon Mortgages offer up to 30-year terms, full and alt-doc options and can often cater to complex portfolio structures and diverse income streams.
To learn more about how we can help your clients unlock more potential in property investment, please get in touch.
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