What is an SMSF loan: Using your retirement savings to invest in property
A self-managed super fund (SMSF) is a retirement fund which is managed privately by you. An SMSF home loan lets you use these retirement savings as a deposit for an investment property, with any returns on the investment being directed back into your superannuation fund.
What is a self managed super fund?
A self managed super fund is privately managed by you, which gives you control over how your retirement savings are invested.
This makes it unlike an industry or retail super fund, which manages your investments for you.
An SMSF cannot have any more than six members in the fund, and it also falls on you to make sure the SMSF abides by tax and superannuation laws.
Managing an SMSF requires a great deal of time and knowledge, and there’s always the risk that your fund will underperform. For this reason, it’s a good idea to speak to an accountant or financial advisor to determine if an SMSF is right for you.
If an SMSF sounds like it’s not right for you, you can compare super funds from Australia’s super providers.
How does an SMSF home loan work?
An SMSF home loan lets you leverage the funds in your self managed super fund to purchase an investment property. Any rental income or capital gains from the property are reinvested, and can only be accessed at retirement.
Strict conditions apply when using your SMSF to purchase property which include:
- The property must be used solely to provide retirement benefits to fund members.
- The property must not be acquired from a related party of a member.
- A fund member or related party cannot live in the property.
- A fund member or related party cannot rent the property.
In addition, the Australian Tax Office (ATO) says your SMSF must pass the sole purpose test if it is to be eligible for the usual super fund tax concessions. This means it can’t be used for any other purpose besides providing a retirement benefit to you and other members.
If you live in the property or receive income from it, this is considered a pre-retirement benefit. The ATO considers this a serious offence, and can result in civil and criminal penalties.
Buying property with your SMSF
Before you get started, it’s recommended you speak to a licensed financial adviser with an Australian financial services (AFS) licence.
It could also be beneficial to speak with a legal professional with expertise in SMSF lending, as they can help you plan your purchase and make sure your SMSF complies with all legislative requirements.
When it comes time to submit a home loan application, be sure to weigh up your options carefully. Not all lenders offer SMSF home loans, and the ones that do tend to charge higher interest rates than traditional home loans.
If your application is successful, a custodian will put up the property as security with the lender. The loan is a limited recourse borrowing arrangement (LRBA), which means the lender is not entitled to any other assets held in the SMSF if the loan defaults.
You will need to make sure the SMSF has enough money to cover repayments, not to mention stamp duty, insurance and maintenance costs. If the property is rented out, the rental income must go towards paying off the loan and cannot be pocketed.
Once the loan balance has been paid off in full, the legal title to the property will be transferred from the custodian to the SMSF. At this point, your fund can continue receiving rental payments or the property can be sold off.
SMSF home loan options
loans.com.au SMSF Home Loan (Variable / 70% LVR)
- Competitive 6.99% p.a. variable rate (7.00% p.a. comparison rate*)
- Free extra repayments
- No ongoing fees
- $230 valuation fee and $300 discharge fee
This SMSF home loan comes with a 6.99% p.a. variable rate (7.00% p.a. comparison rate*) for borrowers and refinancers with an LVR of 70% or less. You can borrow up to $2 million with this principal and interest (P&I) loan, and we like that you can make extra repayments while on a variable rate without incurring any penalties. Note that there is a $490 legal fee for purchases, and if the loan doesn’t go to full term a $300 discharge fee and $250 discharge documentation fee will apply.
Homestar Star Blue SMSF (Variable / 70% LVR)
- 6.99% p.a. variable rate (7.05% p.a. comparison rate*)
- Comes with an offset account
- No annual fee
- Only available when refinancing
Homestar’s Star Blue SMSF home loan has a competitive variable rate of 6.99% p.a. (7.05% p.a. comparison rate*), though it’s only available to those looking to refinance. You’ll also need an LVR of 70% to secure this rate, which is equal to a first deposit of at least 30%. A maximum loan amount of $2 million is available, and it comes with an offset account and unlimited extra repayments. There’s no annual fee, but you will need to pay legal and valuation fees.
FAQs: SMSF home loans
How much can I borrow with an SMSF loan?
Just as with regular home loans, the amount you’ll be able to borrow will depend on your financial circumstances. When determining your borrowing power, your lender will take into account current interest rates, the loan term, your annual salary and the amount of rental income you expect to receive yearly, just to name a few.
What is the sole purpose test?
According to the sole purpose test, an SMSF must be maintained solely to provide retirement benefits to fund members (or their dependents if a member dies before retirement).
If an SMSF doesn’t meet this requirement, it won’t be eligible for the tax concessions available to regular superannuation funds, and trustees could be met with civil and criminal penalties.
Can I live in a property bought with an SMSF loan?
You cannot live in a property bought using an SMSF loan until you retire. Doing so would be considered personal use of a fund asset and would contravene the sole purpose test. This rule applies not just to fund members, but to any related parties of fund members.
If the property is a commercial property, you are allowed to lease it out to fund members or related parties for business purposes, but there are a few rules you’ll need to follow. For example, it must be leased at the market rate.
What are the risks of an SMSF home loan?
There are a few risks associated with SMSF loans that you’ll need to be aware of, such as:
- Higher costs: SMSF home loans tend to be more expensive than traditional property loans.
- Cash flow issues: You’ll need to make sure your SMSF’s bank account has enough cash flow to cover all expenses relating to the loan. This includes loan repayments, insurance, rates and stamp duty.
- Cannot make alterations to the property: While repairs and maintenance to the property are allowed, you won’t be able to make any renovations that would change the character of the property until the loan is paid off.
- Difficult to cancel: If you take issue with the terms of your loan after it has been set up, you will find it’s extremely difficult to unwind the arrangement. If you’re forced to sell the property because of this, you might suffer substantial losses.
- Tax losses: You won’t be able to offset any tax losses from the property against the taxable income you receive outside the fund.
