Self managed super fund home loans

You are now able to buy a residential, rural, commercial or industrial property through your self managed super fund (SMSF) and the mortgage brokers at Intellichoice are here to assist in facilitating the growth of your property portfolio! Changes to the Superannuation Industry Act (SIS) ACT) in September 2007 means that your self managed super fund can now borrow money to purchase real estate in Australia. This exciting new development means that investors now have a much larger choice and control over what investments they can include in their SMSF, including investment properties.

How does it work?

Your SMSF wants to buy property (either residential, rural or commercial real estate), but it does not have enough funds for the full purchase. The SMSF can now make an equity contribution on the property and borrow the remainder of the funds to complete the purchase.

An example of a SMSF at work

Your self managed super fund has $150,000 in the cash account. As the SMSF trustee, you want to buy an investment property worth $450,000. A trustee can buy the investment property on behalf of your SMSF under an instalment arrangement.

The $150,000 is used to make an initial payment for the property. The shortfall of $300,000 plus stamp duty and acquisition costs is funded by a limited recourse home loan, using the property as security.

The trustee arranges for the property to be leased to an unrelated party and the rent, together with other SMSF income and/or member contributions are used to make instalment payments.

Once the home loan is paid off, the legal ownership of the property can be transferred to the SMSF.

• Your SMSF can acquire property worth more than its available funds through the benefits of gearing

• SMSF assets are secure, as the mortgage lender does not have recourse to your SMSF's other assets in the event of default

• Your self managed super fund receives all income and capital growth even if the property has not been paid off

• Your SMSF can use income generated from the property to help pay off the home loan

• Interest from the home loan may be claimed as tax deductions by the self managed super fund and can potentially reduce your SMSF's tax liability

Features of a SMSF home loan

• The self managed super fund must purchase property from an unrelated party. Purchases must be arms length

• Investment in property must be consistent with your SMSF investment strategy

• In the event of a home loan default, the mortgage lender only has recourse to the property used as security and cannot claim any other assets in the SMSF

• The property is held in trust for the SMSF, which is entitled to its income

• Your SMSF makes the home loan repayments. After the home loan is repaid in full, the legal ownership of the investment property is transferred to the SMSF

• You can choose any kind of property including residential, commercial, rural, industrial or retail property

• The legal owner of the real estate will be the Property Trustee

• The beneficial owner of the real estate is the SMSF

• As mortgage lender has no recourse to the other assets in the SMSF, this provides the SMSF with absolute protection for its other assets

• The home loan used to purchase the property through the SMSF are personally guaranteed by the member/s of the SMSF

• SMSFs can deal with the property in the same way as investors would deal with 'normal' investment properties outside of the self managed super fun. For example, you can still lease out the property, renovate, make repairs etc. However, this is subject to the terms and conditions of the home loan

• Rent is paid directly to the SMSF. Home loan repayments are made in the ordinary way from the SMSF

• The SMSF can pay out or reduce the home loan at any time - subject to the terms of the relevant home loan

• When the home loan is paid out in full, title to the property can be transferred to the self managed super fund or the property

• The trustee can continue as registered proprietor

For more information about SMSF home loans or if you are looking for an investment property for your SMSF, speak to the mortgage brokers at Intellichoice on 1300 55 10 45.

Buy property with your SMSF

Change in rules for borrowing against SMSFs

Back in September 2007 the rules governing self managed super funds (SMSF) changed so that you could now use your super funds to borrow to invest in an asset, including property. Up until then, if you wanted to buy property, your super fund had to purchase it outright. But with the  new changes to super, you can borrow up to 80% of the property value depending on the type of property and mortgage lender.

So if you have a self managed super fund, or are considering one, this could be a great way to leverage super and grow your assets.

What sort of property can I buy with my SMSF?

Through your self managed super fund, you can get a home loan to purchase property, including residential, commercial, retail, rural or holiday apartments. It's important to remember that this is for investment property only so you can't live in it.

How does the SMSF work?

1. Get a lawyer to establish a property trust outside your super fund
2. You find an investment property, pay a deposit and borrow the rest from a mortgage lender through your SMSF
3. The Property Trustee purchases the property and becomes the legal owner
4. The Property Trustee grants a real property mortgage over to your mortgage lender
5. Rent from the property is paid into your SMSF
6. Pay off the home loan to the mortgage lender through your SMSF
7. The beneficiary of the property is your SMSF

What are the benefits of borrowing through your SMSF to purchase an investment property in Australia?

Some of the advantages of a SMSF home loan is:

• The ability to leverage an asset

• Numerous tax benefits

• Diversification for your investment portfolio

• 10% capital gains if you hold the property for more than 12 months and potentially nil if the property is sold when the self managed super fund is in pension phase

• Tax deductible interest costs

• The mortgage lender has no access to other assets in your SMSF

• Rent generated from the property does not count as a taxed contribution

Should you borrow to invest in property with your SMSF?

Things you need to take into account before you get a home loan and purchase investment properties with your SMSF:

1. Do you have the cash flow and capacity to service the home loan? The bank will value the property and decide whether the rental income and any additional super contributions you make can cover the home loan.

2. Does your SMSF allow for this type of borrowing? You need to make sure that your trust deeds allows it, and you might need to provide provisions for it to do so. We recommend that you speak with your financial advisor first.

3. Does it tie in with your investment strategy? We recommend that you speak with your financial advisor to ensure it suits your needs, circumstances and investment strategy.

4. Can you cover additional costs associated with buying an investment property? Your SMSF is responsible for council rates, land tax, home loan interest and loan repayments, lender's fees, legal and accounting fees, repairs, property management costs, insurances, etc