Buying a Property Through Super Loans
SMSFs used to be barred from being tapped for purchasing properties. But recent laws have acknowledged that super funds can be useful in achieving the target asset growth required to have a peaceful retirement.
Requirements and Criteria for Lending
Self-managed superannuation funds (SMSF) can be used to purchase properties at better rates. The tax incentive associated with borrowing through a super fund gives property investors a huge advantage in maximising profits.
But what do lenders look for in SMSF loan applicants? Here are the major criteria lenders consider:
- The deposit should at least amount to 30% of the property’s value.
- The expected income that the property can generate is included in your capability to repay the loan.
- The contribution pattern of fund members since this equates to the capability of the fund to meet monthly repayment obligations.
- The trust deed must permit property investments.
- There should be a clear-cut SMSF investment strategy that includes purchasing properties for income generation.
- The SMSF structure must be compliant with ASIC and ATO regulations.
Take note that you can only purchase properties that satisfy these conditions:
- The property must comply with the ‘sole purpose test’ which states that the only objective of the property is to provide retirement benefits to fund members.
- The property must not be purchased from a related party of any of the fund members.
- Fund members and related parties cannot live or rent the property.
There are also restrictions on the kind of property or the purpose of purchasing it. According to regulations, you can’t buy properties that fall under these criteria:
- It is for redevelopment and resale.
- It’s a property owned by a friend.
- It’s a holiday home intended to be used by an associate.
- It’s a property located overseas.
Commercial properties, on the other hand, can be leased to fund members for their respective businesses.
Rates and Fees
Super loans allow the purchase of bigger income-producing properties that can be hard to obtain with the usual individual loan. However, super loans are more restrictive, require higher deposits, and provide a lower loanable amount.
Generally, you can borrow up to 70% of the property’s value through SMSF. The minimum amount that can be borrowed is $100,000, while the maximum varies depending on the financial capacity of the fund.
Aside from the interest rate, there are fees involved in borrowing money from your super to buy a property. Legal, upfront, stamp duty, management, and bank fees can pile up and eat into your super savings.
The interest rate offered by banks and non-banks for SMSF loans ranges from 5.30% to 6.30%. Just like ordinary loans, variable or fixed interest rates may be applied. The interest rate will also depend on the type of property you want to purchase, whether it’s a residential or a commercial one.
Credit unions, building societies, and other smaller non-bank lenders often offer more competitive SMSF loan interest rates and fees. Banks tend to charge higher application and maintenance fees since SMSF lending is fairly new in the mortgage market.
One of the advantages of borrowing through your super is that it’s counted as a non-recourse loan. This means banks can’t come after your retirement savings in case you default on the loan.
Although it’s challenging to purchase a property through a super fund, the tax incentives that can be enjoyed with an SMSF loan can outweigh the costs and fees for maintaining the fund. Consider these factors in deciding whether it’s better to buy an income-generating property through an SMSF or an ordinary mortgage.