Borrowing within a Self Managed Superannuation Fund (SMSF) opens up property investment opportunities otherwise unavailable to some people – but it’s not without challenges.
It’s important that would-be SMSF holders don’t ‘fly blind’ in what is a complex and highly regulated area.
Maximising super returns
Many people have a substantial sum of money sitting in superannuation but want to see it work harder.
Generally, it’s not until later in life that we take a keen interest in how hard our superannuation is working – for many, it still tends to be viewed as a ‘set and forget’ investment.
The scope to have more control over the growth of our superannuation through an SMSF is now more accessible, and for individuals or couples with a combined superannuation balance as low as $120,000 to $150,000 the opportunity to invest in property is a very real prospect.
For example, a couple unable to afford an investment property directly but who have around $100,000 each in superannuation could consider purchasing property within an SMSF if they’re both still working. The $200,000 is a significant deposit – add to that the rent and 9% superannuation contribution guarantee and a lender would regard that as sufficient to approve a loan.
Have clear goals
It’s vital that you’re clear about your goals for your SMSF so that a strategy can be developed.
One aspect to consider, for example, is the diversity of your investment portfolio. If you have one property valued at $800,000 sitting in your SMSF and no other investments, your exposure to one asset class may adversely impact on your retirement earnings.
In addition to working with professionals with a proven track record in this area – an accountant, solicitor, financial adviser or tax adviser – it’s important to have the support of a mortgage broker who has experience in assisting borrowers to fund SMSF property investments.
Those who work with a mortgage broker should expect to be kept well informed throughout the process, ensure they understand every aspect of the selection of the lender and the course of action taken, and to maintain close communication with the fund’s other advisers.
SMSFs are complex and, ultimately, the responsibility to comply with regulations falls on the SMSF trustee – that’s you.
As such, you should expect all of your advisors to keep you well informed and ensure that you understand every aspect of the work they are conducting on your behalf.
SMSF loan options
SMSF loans are very basic and don’t provide many of the features found in a traditional home loan, such as redraw or repayment holidays, but the lender option you do select impacts on your investment’s earnings.
Ultimately, you don’t want to go into retirement with an asset that has debt against it, so you will ideally want to pay off SMSF debt before retirement.
Whether you select interest only or principal and interest repayments will depend on your unique situation and the advice of your tax adviser.
Generally speaking, however, those with bad debt – debt that does not generate income – will want to pay that off as a priority, so they may elect to make interest only payments on their investment property while paying off that debt.
Conversely, those with investment debt only may elect to make principal and interest repayments in order to reduce the debt as they head toward retirement.
If you buy an investment property outside of super, you can use the equity in that property to purchase another property – so, you could borrow 100% plus the associated property purchase costs.
However, within an SMSF you need a larger deposit. It varies, but it will be around 25% as a minimum, as well as a ‘float’ where rents can be deposited and fund-related costs can be paid. Once the money has gone into this ‘float’, you can’t withdraw it.
Fee structures, legal costs and other imposts also vary considerably between lenders, potentially adding thousands of dollars to the cost to fund an SMSF.
Lenders’ requirements for SMSF loans are more rigid and complex, and vary from lender to lender, so the assistance of a mortgage broker with experience in this area can prove invaluable.