Self-Managed Super Fund (SMSF) Loans

Q: What Documents Are Required Before Applying?

These are the documents required for you to organise before applying for an SMSF loan: Copy of certified SMSF Trust Deed (including any deeds of variation) and SMSF Property (Bare) Trust Deed, signed and dated. Funds to complete in SMSF fund statement or cash-management account (If not established, a letter from adviser confirming the rollover amount). For PAYG: Two most Recent Payslips, evidencing super contributions. For Self-Employed: Two years personal tax returns and Notices of Assessment. Company financials and business tax returns might also be required, or the last two years SMSF cash-management account statements, or existing superannuation statements to be rolled over, evidencing contributions, cash and investments. Evidence of rental of the proposed property (appraisal), and rental statements for any other properties held by the fund not taken as security (if applicable)An exit strategy, in some cases. If SMSF trust is established, then the lender might require two years of audited financial statements, tax returns, and SMSF Auditor reports (if applicable).

Q: Can I Refinance My Current SMSF Loan?

Refinancing an SMSF loan is possible, but lenders typically restrict the new loan term. Most lenders will match the remaining term of your current loan, rather than resetting it to 30 years. For example, if you initially took out a 30-year SMSF loan and have 27 years left, the new lender will probably offer a 27-year term unless you provide a strong justification for extending it back to 30 years. This can affect your borrowing power, as a shorter loan term generally means higher repayments. If youre considering refinancing, its important to assess how the new loan structure will affect your SMSFs cashflow and investment strategy. Consulting with an expert can help you navigate these restrictions and explore your options. Learn more about refinancing an SMSF loan.

Q: What Are The Pros And Cons Of An SMSF Loan?

The pros of SMSF loans are: Trustees have control over investment decisions, so you can align your strategies with your retirement goals. Investors can purchase higher-value assets, which can lead to greater capital gains if you choose to sell. Income and capital gains from SMSF investments are taxed at concessional rates, and interest payments may be tax-deductible. SMSF loans facilitate investment in a variety of asset types, spreading risk and enhancing diversification. The cons of SMSF loans are: SMSF loans often come with higher setup, legal, and ongoing administration costs than traditional investment loans. The rules governing SMSF loans are complex and stringent, requiring professional advice to navigate effectively. Investments may not generate sufficient income to cover loan repayments, affecting the funds liquidity. If the property value drops, SMSF members may need to contribute additional funds to avoid default.

Q: What Is A Bare Trust?

A bare trust is a simple trust structure used in Self-Managed Super Fund (SMSF) property investments to hold the legal title of an asset on behalf of the SMSF. The trustee of the bare trust, often called a custodian trustee, holds the asset, such as a property, but the SMSF retains the beneficial ownership. This means all profits, rental income, and capital gains belong to the SMSF. Single-Purpose Trust: It is set up solely for the purpose of holding the asset and does not engage in any other activities. No Active Management: The bare trust has no discretion or control over the asset; SMSF trustees make the decisions. Limited Recourse Borrowing Arrangement (LRBA): It is typically used when the SMSF takes out a loan to purchase a property within a bare trust. Once the loan is fully paid off, the ownership will be transferred from the bare trust to the SMSF.

Q: Can I Renovate My SMSF property?

Not while the loan exists. You can only make maintenance repairs.

Q: Do I Need An Exit Strategy?

Its better to have an exit strategy. SMSF trustees should plan long-term exit strategies, as selling a property within an SMSF is complex and subject to capital gains tax. If there is no clear path, members might face difficulties assessing super funds upon retirement or death. Here are some exit strategies for SMSF property investment: Transfer the property to a member in retirement Keep the property in the SMSF and draw pension income Sell the property after moving into pension phase Transfer the property to beneficiaries after death Refinance or pay off the loan early.

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What Is An SMSF Loan?

An SMSF loan allows you to use your Self-Managed Super Fund (SMSF) to borrow money to purchase residential or commercial investment properties. This type of loan is structured as a Limited Recourse Borrowing Arrangement (LBRA), which means if the SMSF defaults on the loan, the lender can claim only the property purchased with the loan and not the other assets within the SMSF.

Why Buy Property In An SMSF?

Tax Benefits

Concessional Tax Rates: Income generated from properties held within an SMSF is taxed at a lower rate than personal tax rates, which could enhance overall return on investment.
Capital Gains Tax Exemptions: Upon retirement, capital gains from the sale of properties can be exempt from tax if the assets are held for more than 12 months.
Tax Deductions: SMSF members can claim tax deductions on expenses related to property management, loan repayments, and depreciation, further reducing taxable income.

Investment Leverage

Ability To Borrow: SMSFs can leverage loans to purchase properties, allowing investors to acquire higher-value assets without needing the full purchase price upfront.
Income use: You can use the rental income generated from the property to repay the SMSF loan, keeping personal finances separate and improving cashflow management.

Control And Flexibility

Diverse Investment Options: SMSFs allow for investment in various types of properties, including residential and commercial real estate, which helps diversify your portfolio and spread risk.

Who Qualifies For SMSF Loans?

To qualify for an SMSF loan, a fund must be properly established (in most cases; see below), which includes having a compliant trust deed and appointing trustees who adhere to the regulations of the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC). The investment strategy must align with the fund’s objectives to ensure compliance.

You also need to have:

A liquidity buffer, typically around 5-10% of the property’s value, to ensure that the SMSF can cover ongoing expenses and loan repayments, even after purchasing the property.
Sufficient rental income to cover loan repayments and other expenses.
A consistent and steady contribution history to the SMSF from its members.
Good credit history among trustees, reflecting reliability in managing debt.
An SMSF loan requires at least a 20-40% deposit, so check whether your fund has enough capital.

Tip: We work with a lender who can assess applications even if your SMSF has not yet been set up. Instead of past contributions, they require evidence that future contributions will be made. This is a niche option and will be approved on a case-by-case basis.

How Much Can I Borrow?

Standard SMSF Investment Loans: Borrow up to 80% of the property value for residential properties. In rare cases, up to 90% may be available.
Commercial property: Up to 80% of the property value for non-specialised securities.
Bad credit: Up to 80% of the value of a residential property or 75% of the value of a commercial property, with an SMSF bad-credit loan.

The final decision from the lender will depend on the overall strength of the application. Our SMSF loan experts will work with you to increase your chances of approval. Talk to us today. Call us on 1300 889 743 or enquire online, free.

Calculate SMSF Borrowing Power

Lenders use different methods of assessing your SMSF borrowing power. This helps them determine the type of property your fund can afford.

You can use our SMSF borrowing power calculator for more details.

Getting Started

If you are ready to buy a property using an SMSF loan, the SMSF specialists at Home Loan Experts are here to help.

1. Consult With The Experts

Speak with one of our SMSF loan specialists to discuss your fund’s financial situation and investment goals. We assess your SMSF’s borrowing capacity, ensuring your fund meets lender requirements such as sufficient contributions, reserves, and a solid investment strategy.

2. Organise What You’ll Need

Provide proof of your SMSF’s financial position, including member contributions, fund reserves, and a viable repayment strategy. Have sufficient funds in your SMSF to cover the required deposit (usually 20-40%) and upfront costs such as legal fees and stamp duty.

3. Approval and Settlement

We compare lenders to find the most suitable loan for your SMSF and submit the application on your behalf. Once approved, we guide you through the settlement process, ensuring your SMSF and bare trust structures are properly aligned.

Home Loan Experts can guide you through these requirements, simplifying the process and helping you secure your SMSF loan efficiently. Call us on 1300 889 743 or enquire online to get a free assessment.

Ron And Becky Expand Their Business with An SMSF Commercial Loan

Ron, an experienced accountant and director of his firm for over a decade, and his wife Becky, a midwife, dreamed of purchasing a commercial investment property through their SMSF. The plan? Rent it to Ron’s accounting firm to expand operations. However, securing an SMSF commercial property loan proved daunting due to its complexity and the niche requirements of such loans.

They reached out to a mortgage broker at Home Loan Experts, who stepped in to simplify the process. By analysing multiple lenders, we identified a financial solution that matched Ron and Becky’s needs. We gathered the required documentation, including trust deeds, financial statements, and rental income projections, and facilitated formal approval within just one month.

Thanks to our expertise, Ron and Becky successfully purchased the office space in Springwood, QLD. The property now serves as a valuable asset for their SMSF and a strategic investment for Ron’s growing accounting firm.

Read their client story about SMSF.

SMSF Loan FAQs

How Do SMSF Loans Work?

Establish The SMSF: The first step is to set up an SMSF, which involves creating a trust deed that outlines the fund’s rules and governance. This structure allows you to borrow money from your SMSF to purchase properties. You can work with an accountant or SMSF specialist to help you establish the SMSF.
Get Pre-Approved: Once that’s established, speak to an SMSF loan expert or a lender to get pre-approved, to determine how much you can borrow so you have a clearer budget to start your property search. The lender will assess you on factors like the expected rental income, compliance with regulatory requirements and the SMSF’s financial health.
Set Up A Bare Trust: Once you get pre-approval, a bare trust must be established to hold the property on behalf of the SMSF. Since SMSFs cannot directly hold a loan, the property must be held in a Bare Trust. The trustee of this bare trust must be independent of the SMSF trustee, often taking the form of a corporate trustee. This structure is crucial, as it allows for Limited Recourse Borrowing Arrangements (LRBAs), meaning that in case of default, the lender can claim only the property purchased with the loan.
Finalise Purchase Contract: You can now negotiate and finalise a contract for property purchase. The contract must be in the name of the bare trustee, rather than directly under the SMSF.
Get Formal Approval: After the contract signing, the lender will do a property valuation to confirm its market value and ensure it meets lending criteria. Once completed and all documents required are in order, you will get formal approval.
Settlement: You will now receive specific mortgage documents that outline the terms of borrowing. Once you’ve signed and returned the documents, the settlement process begins, which involves transferring ownership of the property to the bare trust. The SMSF pays for the deposit and associated costs from its bank account.

Getting Pre-Approved First

Most lenders require your SMSF to be fully set up before applying for a loan. However, we have one lender on our panel that allows you to apply for pre-approval before your SMSF is established. The process works as follows:

Apply for pre-approval
Set up your SMSF
Submit the formal loan application

This is a niche option and may not suit all borrowers. If you're considering this approach, it's important to seek expert guidance to ensure it aligns with your investment strategy.

After settlement, the SMSF is responsible for managing ongoing expenses related to the property, such as mortgage repayments, maintenance costs, and insurance. Rental income generated from the property flows back into the SMSF, contributing to retirement savings growth. Once the loan is fully repaid, the legal title can be transferred from the bare trust to the SMSF or remain under the bare trust structure based on strategic decisions the trustees make.

What Documents Are Required Before Applying?

Can I Refinance My Current SMSF Loan?

What Are The Pros And Cons Of An SMSF Loan?

What Is A Bare Trust?

Can I Renovate My SMSF property?

Do I Need An Exit Strategy?

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SMSF Loans

What Is An SMSF Loan?