Self-Managed Super Fund (SMSF) Loans
Residential
An SMSF residential loan is used to purchase investment property within a self-managed super fund. The income generated from this investment such as rental income or capital gains is directed back into the SMSF, helping to grow retirement savings. These loans are an attractive option for those looking to diversify their superannuation portfolio while leveraging the potential of property as a long-term investment.
Commercial
Commercial SMSF loans are ideal for individuals looking to invest their superannuation in commercial property. This could include office spaces, retail shops, or industrial properties. Business owners often use these loans to purchase premises for their operations, enabling them to pay rent directly to their own SMSF.
A key consideration for obtaining an SMSF commercial loan is ensuring strong loan security. Lenders often view well-secured loans favourably, which can improve the chances of loan approval.
Key Rules for SMSF Property Investments
Investing in property through an SMSF comes with strict compliance rules. The property must:
- Meet the ‘Sole Purpose Test’: The property must be acquired solely to provide retirement benefits for SMSF members.
- Not Be Purchased from a Related Party: Properties cannot be bought from a related party of any SMSF member.
- Not Be Used for Personal Purposes: Fund members or their related parties cannot live in or rent the property.
- Generate Independent Returns: The investment must function independently, providing rental income or capital growth benefits.
Restrictions on SMSF Loans
SMSF loans come with certain restrictions, which must be understood before making an investment decision:
- Construction Loans Are Not Allowed
SMSFs cannot use borrowed funds for construction purposes. However, existing funds within the SMSF can be used for renovations, provided these do not constitute major structural changes. - Refinancing Options Are Limited
Refinancing existing SMSF loans is limited to a few lenders. Therefore, careful selection of the lender at the outset is crucial. - No Personal Use of Property
- Residential Properties: Properties purchased through an SMSF cannot be used as a primary residence by members or their related parties.
- Commercial Properties: Owner-occupied business premises are acceptable, provided they comply with SMSF rules.
- Restrictions on Related-Party Transactions
SMSFs cannot purchase residential property from members or their related parties. However, commercial property may be sold to an SMSF under specific conditions. - Liquidity Requirements
Banks often have strict liquidity requirements for SMSFs, ensuring the fund has enough cash reserves to cover loan repayments and other expenses. Some lenders offer more lenient policies than others.
Borrowing Capacity with SMSF Loans
The amount an SMSF can borrow depends on the type of property and the lender’s policies:
- Residential Investment Loans:
Borrow up to 80% of the property value, though most lenders cap this at 75% of the property value. - Commercial Property Loans:
Borrow up to 70% of the property value, particularly for non-specialised securities.
Lending policies for SMSFs vary significantly between lenders, particularly in assessing the fund’s ability to repay the loan. This is where working with an experienced team is crucial to identify the best lending options and structure your loan effectively.
If you would like more information on Self-Managed Super Funds, please contact the team at TFC today!