Home Loan Rate – Australia

What is an SMSF?

A Self Managed Super Fund is a trust you use in order to manage your own superannuation. Basically instead of the employer provided super fund, you have direct control over your assets. This enables you to choose where you invest your money for your retirement.

You can put the money in a number of different places including capital investments such as shares and property. Each different investment comes with a variety of risks.

What laws and restrictions will affect investing in property?

Whilst is is possible to use your fund to invest in property, there are certain laws and restrictions that can affect your eligibility and limit the options you have available.

Some examples of the legal conditions under which an SMSF can borrow money include;

• The asset is an asset that the SMSF (you) could legally otherwise acquire if it had available funds
• A security trust (security custodian) holds the asset until all repayments are made.
• Once all repayments have been made the SMSF must have the right to acquire legal title of the asset from the Security Trustee

How much you can borrow with these loans differs from normal mortgage applications. Standard investment loans are offered at up to 80% of the property value however lenders usually restrict the amount to 72% or 75%.

It is also important to note that loc doc loans are not available and the fund must be able to prove it can repay the loan.

Which banks and lenders can help and what interest rates are available?

Many banks are not willing to lend to SMSFs. They believe that the loans are more complex and lead to less profit. However there are a number of lenders that do not see it this way and are willing to assess an application. These can be difficult to find however without professional help from a mortgage broker.

Interest rates for SMSF loans are higher than for normal property purchases. Depending upon your circumstances and the risks the lenders perceive, low interest rates may be available. However as there are large differences in pricing between the major lenders this depends largely upon which bank you apply to.

What are the risks associated with investing in property this way?

Property is what is called a capital growth investment and can be useful for capital gains and tax benefits using negative gearing and depreciation allowances. However as the global financial crisis showed, value can fall from time to time possibly leading to large capital losses.

As for cash flow, the property may be vacant or tenants may not pay rent and you may default on your repayments. If the situation arises where you need money it is also difficult to sell quickly at a high price.

How Should I Apply?

Applying for a loan on your own can be difficult. There are not too many lenders willing to lend to SMSFs and each declined application will affect your eligibility next time around as it will go on your file. Even if you find a lender yourself, such as your current bank, you are unlikely to be offered the lowest interest rate.

Applying through a mortgage broker that works with many different lenders and specialises in different loan types such as SMSF loans, is the safest option. As they know the lending criteria of the banks they are aware of who offers these loans, where you may be eligible to apply and who may have the lowest interest rates.

Most everyone is familiar with the process of applying for home loans as an individual or couple. However, many people don’t know that it is also possible for a trust to obtain a residential loan. Loans to trusts are a bit more complicated in nature, but if you have the right type of trust and can locate an appropriate lender, the loan you need can be secured. 

What is a Trust?

A trust is a legal agreement in which the assets of a person, group of people, or family are owned on their behalf by another person or company. The person or entity that owns and controls the assets is known as the trustee, and the person, group of people, or family allowing the trustee to control said assets are referred to as beneficiaries of the trust. The arrangement is controlled by a trust deed, which is a document stating various rules that must be followed by the trustee, as well as how the profits of the assets are to be distributed among beneficiaries. Most trusts are created to either maximize tax benefits or protect the assets in question. 

Why Are Trusts Created?

The majority of trusts are created to protect a given asset. Since the assets included in the trust are not the legal property of the beneficiaries of the trust, so the assets are therefore safe from the liabilities of the beneficiaries. For example, if the beneficiary of the trust files bankruptcy, the assets in the trust will not be included in the bankruptcy process. In the case where a loan is taken out by the trust, the lender will of course secure a guarantee of repayment. However, no other creditors will be able to touch the assets protected by the trust. 

A trust may also be developed in order to attain certain tax benefits. The government offers the beneficiaries of a trust a 50 percent exemption on capital gains tax. However, this tax benefit does not extend to a company’s shareholders, thus making a trust arrangement more profitable. Trusts can also be used to pass assets from parent to child without incurring taxes. Property can usually only be transferred to one’s children without incurring tax in the event of one’s death, but a trust allows this tax-free exchange to take place while the parent is still alive. Finally, a trust can be used to divide investment income between spouses under a lower tax rate. This process is known as income-splitting. Income-splitting was once also used to divide income among other family members as well, but this is no longer possible. 

Securing a Loan Through a Trust

If you are looking to secure a loan through your trust, you must be careful in choosing the type of trust you will arrange. Some types of trusts are not appealing to lenders. In addition, not many loan brokers are well-educated in the area of trust lending. As a result, many bank employees and residential lenders will not want to lend to a trust and will instead direct you to the commercial lending division. Borrowing from the commercial lending division means more fees and higher interest rates, so it is better to secure a residential mortgage loan if you can. 

The best type of trust to arrange if you hope to secure a loan is a family trust. This type of trust is typically created to protect a family’s assets and provide tax benefits to family members. A family trust is considered a discretionary trust, meaning that the trustee use his or her best judgement to distribute the income and assets included in the trust as long as the rules of the trust deed are not violated. Having this type of trust will offer you the most options for securing a loan through the trust.

It is also possible to borrow through a unit trust, though residential loans to unit trusts are only available from select lenders. A unit trust is a type of trust in which the assets included are divided into shares, or units. Individual beneficiaries will own different numbers of units that represent their entitlement to voting power, income, and capital gains. Units can be held by companies, individuals, or even by other trusts. In addition, a unit can be categorized based on what type of asset it represents. This type of trust is most common when beneficiaries are not all family members. 

Unit trusts do not provide the same degree of tax benefits as a discretionary trust, with the exception of cases in which units are owned by a discretionary trust. In addition, unit trusts aren’t as good at protecting assets either. If for some reason a beneficiary of a unit trust becomes bankrupt, his or her units will be included in the proceedings and will most likely be sold to pay off debt. 

A third type of trust to which loans can be extended is a self-managed super fund trust or SMSF. An SMSF trust is typically created for people that wish to be in charge of their own super fund. In this type of trust, the typical amount of money from a person’s employer will be added to the fund as well as anything he or she wishes to add. Typically, the person in question will act as trustee and retain direct control over the fund. 

Residential loans to a self-managed super fund trust are rare and difficult to secure, but they are possible to obtain. Most lenders require a loan-to-value ratio of no more than 70%, however a select few will allow up to 80% for a SMSF mortgage. Typically, such loans are extended so that the SMSF can invest in residential property. In order for this to work, the property in question must usually be purchased by a limited liability company and held in a trust for the SMSF trust. Once the loan on the property is repaid, the SMSF will have the right to acquire the property. 

The final type of trust we will discuss is the hybrid trust, which combines the features of both a unit trust and discretionary trust. However, it is nearly impossible to secure a loan through this type of arrangement. There are very few lenders that will consider extending a residential loan to a hybrid trust.

Trusts can be very beneficial in many ways. They are used to attain tax benefits as well as to protect important assets from the liabilities of the beneficiaries. In addition, it is sometimes possible to secure a loan through a trust. However, it is important to be careful of the type of trust you create if you intend to use it to obtain a loan. There are several types of trusts that can receive loans including family trusts, unit trusts, and self-managed super fund trusts. The best type of trust for securing a low interest residential loan is the family trust as it is the one with which lenders are typically most comfortable. Finally, it is sometimes possible to obtain a loan through a hybrid trust, though this is a rare occurrence.

Learn more about loans to trusts.

Do you have approximately $150,000 in your Superannuation? If you do, you may be eligible for a Self-managed superannuation fund (SMSF) loan to purchase real estate with your Super!

A vast number of major mortgage brokers and bank managers do not understand SMSF Loans as they are complex and they do not deal with them on a daily basis. This means that errors can be made, and loans declined purely because of their lack of understanding; as such it is strongly advised that you seek expert advice when considering Self Managed Super Fund borrowing.

There are also significant differences between policy and pricing between different banks, so speaking to a specialist mortgage broker such as The Home Loan Experts will ease the confusion that you would face dealing with the different financial institutions directly. You can find out more about their services on their Self Managed Super Fund Loan information page.

What are the benefits to borrowing in your fund?

Since the Superannuation Industry Supervision Act 1993 (SIS ACT) was amended in September of 2007, Funds now have the ability to borrow for Property Investments. This allows DIY Super Funds to take advantage of the same benefits as regular property investors.

Below are some of the benefits available to SMSF loans: (Please note: SMSF loans are also commonly referred to as Warrant Trust Loans, Instalment Warrants or SMSF Trust Loans.)

• Reduces tax rate on rental income to 15%
• Tax advantages on sale of investment property
• Super Funds are able to purchase property worth more than it’s available funds through the benefit of gearing
• You can use income from the security to help pay off the loan
• Extensive tax deductions can be claimed by the Super Fund
• Funds receive all income and capital growth, even if the property has not been paid off as yet
• Superannuation assets are secure, as the lender does not have recourse to the SMSF’s other assets in the event of default

How do I purchase a property with my SMSF?

Self-managed Superannuation Funds can choose any type of property as investment; these investment properties include Commercial, Residential, Holiday Units and Retail. However, you must ensure that the property complies with the SIS ACT, the SMSF’s overall investment strategy (Superannuation funds must have a written investment strategy in place), and that the Fund has sufficient equity to complete the purchase.

Here are some basic guidelines as to how a SMSF purchases a property: (Please Note: The SMSF must purchase property from an unrelated party. Purchases must be at arm’s length.)

• Establish your SMSF – The Trust Deed establishing the fund must have the power to Purchase Real Estate, Borrow Money, and Mortgage Property to secure payment of that borrowing
• Obtain a loan approval – it is recommended to obtain a Pre-Approval on your Superannuation Fund before paying your deposit
• Establish the property Trust Deed – this is something that your accountant or financial adviser will need to create. It is also important that the SMSF Trustee itself is not the Property Trustee, nor are the individual member of the SMSF are to act as Property Trustee – as this will breach the regulations of the SIS ACT
• Exchange of Contract – deposit to be paid from Superannuation Fund
• Formal Approval – Once Valuation on security is completed the lender will issue a Formal Approval
• Loan Documents Issued – The lender will have their solicitor prepare loan documents and issue to you
• Settlement – On completion of the purchase the Property Trustee mortgages the property to the lender

How is the loan structured?

The property itself is owned by a security trustee. You can click on the below picture for a detailed flowchart of how the mortgage & ownership of the property will be setup.

What are the features of a Super Fund Loan?

• Members of the SMSF are unable to reside in the investment residential property – however they can do so after retirement, providing it is transferred from the SMSF before hand
• The lender has no recourse to the other assets of the Super Fund, providing the SMSF with absolute protection for its other assets
• The Super Fund receives the income from the investment property
• The legal owner of the real estate will be the Property Trustee
• The beneficial owner of the real estate is the Super Fund
• The Fund can make any adjustments to the property as it sees fit (e.g. Lease, renovate, repair, or sell) providing this is in conjunction with the loan terms
• The SMSF has the ability to reduce or pay out the loan at any time (subject to the terms and conditions of the lender and loan)
• After the loan is repaid to the lender the legal ownership of the security will be transferred to the Super Fund – repayments of the loan are made from the SMSF

Compare Lenders

Below is a quick comparison of the policies used by some the major lenders we deal with for super fund loans:

Lender 1:

• Repayments: Principal & Interest
• Loan Term: 30 years (residential), 15 years (commercial)
• Maximum loan size: $4,000,000
• Maximum LVR: 80% (residential), 65% (commercial)
• Security: Residential or commercial

Lender 2:

• Repayments: Principal & Interest
• Loan Term: 25 years (residential), 15 years (commercial / rural)
• Maximum loan size: $5,000,000
• Maximum LVR: 80% (residential), 60% (commercial), 50% (rural)
• Security: Residential, commercial or rural

Lender 3:

• Repayments: Principal & Interest (fixed rates available)
• Loan Term: 30 years (residential)
• Maximum loan size: $500,000
• Maximum LVR: 80% (residential)
• Security: Residential

Seeking advice – how important is it really?

There are number of rules and regulations regarding establishing a Self-Managed Superannuation Fund and planning for your retirement.

As such it is highly recommended that you seek professional advice by selecting a qualified accountant, and a specialist mortgage broker. You can find out more about borrowing in your super fund the Home Loan Experts SMSF Trust Loan page.

It goes without saying that you should obtain professional tax and legal advice before establishing your own Super Fund, purchasing a property in a fund or applying for a mortgage with your fund.