Assuming you already understand the limitations and legalities around borrowing to buy an asset inside your SMSF, it is important to understand what lenders are looking for when you apply for an SMSF Loan. This understanding can speed up the loan approval process and ensure you don’t get caught short just before settlement. In this article we will look at the case for borrowing to buy property, the most typical situation for an SMSF looking to borrow funds.
Who are the lenders?
There are in increasing array of lenders now offering an SMSF loan product. Because the legal structuring of lending to an SMSF is very different to a typical investment loan, lenders have developed specialised loan products to meet that need. Some lenders active in this space include AMP, St George, Macquarie, AFG, Liberty and the major banks.
What properties will lenders finance?
If your investment is for a metro located property, you will find lenders far more willing to talk to you. Regional properties are less appealing to lenders and some may not lend at all against them. Likewise fully constructed properties are the norm. You may not be able to get finance for a house and land package, with progress payments and security against an unfinished property a potential issue.
You can look to finance or refinance residential, rural residential and commercial property. Loans can be structured as fixed rate or variable rate and interest only options are available. Loan terms up to 30 years are possible.
What are some of the restrictions?
For residential property, the lender will often only lend against a single title, so beware of unusually structured transactions (such as car parks on a separate title or land split over two titles). Loan to value ratios tend to max out at 80% so ensure that you have enough available funding in the SMSF for the 20% equity component as well as costs. Commercial property loans typically require a lower loan-to-value ratio of up to 65%.
In regard to serviceability, the lender will usually consider only 80% of your PAYG superannuation guarantee and 80% of historical additional contributions. If you haven’t made additional contributions in the past, but intend to do so in the future to improve serviceability the bank may consider that in some circumstances. Rent will typically be considered at 80% for serviceability calculations.
What information do I require?
To receive your finance approval you will need to provide a lot of information, but the quicker you do that, the smoother the SMSF Loan approval process will be. Delays in finance approval are often linked to SMSF trustees being tardy providing all the appropriate documentation to the lender. You will need to provide a copy of the contract of sale, the trust deed of your SMSF, the bare trust details, two years of financial and tax returns for the SMSF, evidence of historical super contributions, evidence of the property’s historical rental income, evidence of your deposit (for example showing at least the last three months of account statements), details of the members’ personal assets and liabilities, income and expenses and of course appropriate identification documents.
How much does it cost?
Borrowing for your SMSF can be expensive and you should allow from $3,000 (for a residential property) for the banks costs, including their application and establishment fees, legal fees for review of the SMSF and bare trust deeds, valuation and settlement fees. In addition you may incur legal fees if the bank finds issue with anything in your trust deed. This doesn’t include your advice fees and legal fees to get your entire structure set up in the first place.
In summary to make sure that the financing for your SMSF Loan proceeds smoothly follow a few simple guidelines:
- Be prepared – have your SMSF and bare trust trustee established. Have your documentation completed and available.
- Be aware – know what limitations you have on the type of property you can purchase inside the fund and how much you can borrow. Check that the property is on one title with no charges or caveats and that the contract of sale is signed in the correct name.
- Be available – to provide your documentation, sign forms and respond to queries by the lender. Don’t do it when you are about to go on an overseas holiday.
- Be patient – allow enough time to complete the transaction. SMSF Loans are more complex and typically take longer to approve than normal investment loans.
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