Some people enjoy the freedom that comes with managing their own superannuation fund and even decide to use it to invest in the property market. Self managed super fund loans can help when you’re considering investing through your super, but there are complex rules and regulations to be aware of. Here are three common questions about SMSF loans to help make the process simpler.
1. Who’s involved?
There are a number of components to SMSF borrowing:
• The SMSF Trustee – secures the loan to buy the property
• Lender – provides the funds to purchase the property through a SMSF loan
• Third Party (bare trust) – is the legal owner of the property and holds the legal title on behalf of the SMSF trustee.
2. What can I use a SMSF loan for?
If you want to gear your SMSF into residential or commercial real estate but do not have enough for a full purchase, the SMSF can make a contribution towards the investment property and borrow the remaining quantity to complete the transaction. However, your SMSF cannot be used to finance another property under the existing super fund. You can use the SMSF to maintain an existing property, but not to make improvements to the property while the mortgage is still in place.
3. What rules surround SMSF borrowing?
SMSF lending is done under strict borrowing conditions. The main points to note are:
• The property must be purchased from a party who is wholly unrelated to the SMSF trustee
• Limited recourse borrowing applies. This means that if the SMSF defaults on the loan the lender only has recourse to the security property and cannot claim any other SMSF assets
• The property investment must be consistent with your SMSF investment strategy and risk management procedures
• The terms and conditions of the borrowing arrangement must be as if the transaction was done at arm’s length
• The fund must have enough to pay interest and loan repayments – once the mortgage is paid in full the title is transferred to the SMSF
Above all, it’s important to get get specialist advice to make sure this investment strategy is right for you.