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Published June 10, 2024
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What Is A Self-Managed Super Fund (SMSF) Loan?

A self-managed super fund (SMSF) loan allows you to to use super funds to invest in property. Here's what to know about how it works.

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A self-managed super fund (SMSF) property loan is a way investors can leverage super savings to navigate beyond their immediate financial constraints and explore opportunities in residential, commercial, or rural properties. 

As the prospect of home ownership becomes increasingly out of reach for ordinary Australians and more people decide to rentvest, understanding the dynamics of SMSF loans can be a key step to getting into the property market for savvy investors.

What is an SMSF loan?

An SMSF loan is a type of property loan that allows you to use self-managed super fund (SMSF) savings to borrow money to purchase an investment property. 

Unlike traditional home loans, SMSF loans operate within the framework of a self-managed super fund, which means that any rental or capital gains from an SMSF investment go back into the fund. Additionally, those profits can only be accessed under the superannuation access rules, usually when you retire.

What is a self-managed super fund (SMSF)?

An SMSF is a type of superannuation fund managed by the individual or trustee(s) or by a company. It gives individuals the ability to invest in property directly as part of their retirement strategy. 

How does an SMSF loan work?

SMSF loans have flexibility in repayment terms, including options for interest-only payments. Depending on the property type, an SMSF loan can come with varying loan-to-valuation (LVR) ratios — typically, 80% for residential and 70% for commercial property.

Leveraging an SMSF loan allows investors to navigate beyond their immediate financial constraints and explore opportunities in residential, commercial, or rural properties. Here are some key points to understand about how they work. 

SMSF set-up

To get an SMSF loan, you must set up an SMSF that meets all Australian Taxation Office (ATO) requirements

In addition, you’ll also need to have an investment property in mind and make sure it aligns with the SMSF’s strategy. Part of this means ensuring you have enough funds to cover the deposit and other associated costs of buying the property, among other criteria. For example, an SMSF investment strategy may restrict buying options to residential or commercial property only.

SMSF borrowing

Once you’ve confirmed your strategy and resources are sufficient for securing the loan, you’ll need to set up a separate trust — a ‘bare trust’ — to hold the property once it’s secured from a third-party lender. This new trust will act as the legal owner of the property, while investment returns generated from this asset go to the SMSF trustee. 

You must structure your SMSF loan as a limited recourse borrowing arrangement (LRBA) when you apply. This means that if something goes wrong and the loan defaults, the other savings in the SMSF are protected. In other words, the lender’s rights are limited to the assets held in the separate trust, safeguarding other assets within the SMSF.

Strict regulations

The landscape of SMSF loans is incredibly nuanced, and strict rules and regulations govern when and how you can borrow from your super. 

SMSF properties follow regulations when managing property and adhere to compliance requirements, such as audits, tax returns and valuations. 

SMSF trustees also bear a significant responsibility to keep up with evolving superannuation regulations, conduct periodic investment assessments and manage various administrative tasks, such as submitting annual returns or auditor reports. Vigilant trustee oversight and response to emerging regulatory changes are the keys to success — and to avoiding penalties.

🤓 Nerdy Tip

Understanding the intricate compliance requirements of superannuation law is a must. Working with a licensed SMSF expert you trust before taking action or making any decisions is essential.

» MORE: 10 questions to ask your mortgage lender

Getting an SMSF loan

SMSF loans are available to borrowers who manage their super funds according to superannuation regulations. Borrowers can access funds to purchase residential or commercial properties, subject to regulatory restrictions. The SMSF’s financial standing influences the borrowing amount and rates approved by lenders.

SMSF loan lenders 

Not all lenders offer SMSF loans. Lenders offering SMSF loans may charge higher interest rates on SMSF loans than regular home loans.

When assessing SMSF applicants, lenders will consider factors beyond typical home loan eligibility criteria:

  • contributions from current employment
  • the loan amount and property value
  • deposit
  • savings within the SMSF
  • income and employment stability
  • anticipated rental income from the property
  • tax returns of the fund.

Pros and cons of using an SMSF loan 

Unlocking the potential of property investment through a self-managed super fund (SMSF) has emerged as a strategic avenue for investors seeking to enter the property market or broaden their portfolio.

Here are some pros and cons to consider:

Pros

  • Rental income is used to pay off the loan.
  • There are potential tax advantages within the superannuation structure, such as paying only 15% tax on rental income and paying only 10% tax on capital gains after 12 months. 
  • SMSF allows diversification of investment portfolios into the property market and access to higher-value properties.
  • SMSF trustees have full control over their investment decisions.

Cons

  • Managing an SMSF involves complex legal and financial structures, requiring professional advice.
  • Property investments may limit the liquidity of superannuation assets.
  • Stringent compliance is required with superannuation regulations.

While using an SMSF loan can be a great strategic choice for diversifying investments, it can be complicated. Careful consideration of the associated legal structures and compliance is essential for the prudent and successful management of SMSF property investment. 

Frequently asked questions about SMSF loans

Can you use super to buy a live-in house? 

With an SMSF loan, individuals can use their superannuation funds to invest in residential properties in Australia. However, the ATO rules prevent you from living in the property and non-compliance can result in hefty penalties. For more information, visit the ATO’s website.

How much SMSF money is required to purchase property?

As of June 2020, the average SMSF had assets exceeding $1.3 million. However, 94% of SMSF members reported balances below $1.6 million, with the remaining 6% holding balances exceeding $1.6 million. Lenders generally require SMSFs to maintain around 10% to 20% of funds in their account post-settlement to cover potential expenses arising after the property settlement.

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