Borrowing within an SMSF: The 3 Major Differences to your Typical Home Mortgage

Borrowing money in an SMSF follows a similar process to a typical home mortgage, however there are fundamental differences that can impact borrowing capacity and investment acquisition.

If you have (or have had) a mortgage in the past, you may be familiar with standard mortgage requirements. This article serves to highlight the difference between borrowing money within a SMSF compared to a typical mortgage.

For more detailed information on property investing using your super, we have prepared a comprehensive beginners guide available for download here.

The lending differences are driven by the regulations governing the Superannuation space, the same regulations that apply to you as the investor also apply to the lenders (More on this in section #3).

The borrowing differences fall into three areas…

  1. The Borrowing Process
  2. Choice of Lenders
  3. Lending Requirements

On completion of this article you should have a better understanding of the borrowing process within an SMSF and a general understanding of the lending criteria you will need to satisfy if you are considering borrowing money to fund a property in SMSF.

If you’re looking to learn more on how property is purchased in super, the purchasing timeline and investment road blocks, we have prepared a detailed article you can read here.

Note: In order to facilitate borrowing for an investment property purchase in SMSF, you will need a reasonable fund balance, at a minimum $150,000 or approx. 40% of the investment property value.

#1 Differences in the SMSF Borrowing Process

The loan application and purchasing process is basically the same as a standard property purchase, however in an SMSF the loan is provided to the trust, not an individual.

To facilitate the borrowing (and the subsequent purchase) an SMSF and a specific holding trust (Bare Trust) need to be in place, if you don’t already have an SMSF you will need to engage a Financial Planner and an Accountant in addition to a Mortgage Broker or Lender.

The following charts list the difference in lending stages and facilitators for standard vs. SMSF loans…

Standard Property Loan

SMSF Property Loan

It is worth noting: Loan documentation and approvals can only be prepared once the SMSF and holding trusts have been established.

A broker who has experience with SMSF loans can help with the pre-qualification process, meaning you can learn how much you can borrow within an SMSF based on your current superannuation balance(s) and contributions before incuring any costs establishing an SMSF.

Important: Getting an idea of what you can borrow prior to engaging the different service professionals and establishing an SMSF can save you time and money.

#2 Differences in Lending Choices

There are fewer lending institutions operating in the SMSF lending space. The result is less lending products available compared to the home mortgage market.

For lending institutions to operate in the SMSF space they are required to invest substantially into new departments, compliance requirements, staffing, product training and licensing. Not all lending institutions are willing to invest in a comparatively small consumer market.

Even though there is less choice available, the differences between SMSF lenders and their respective servicing requirements are substantial.

#3 Differences in Lending Requirements

A major difference between standard and SMSF property loans is the loan type – SMSF Loans are required to be Limited Recourse Borrowing Arrangements (LRBA).

The investment and loan are quarantined within a specific trust (to protect other cash and investments in the SMSF) the lending institutions recovery is restricted to the investment being purchased with borrowed money.

Due to the additional risk of lending money to SMSFs, lending institutions have put in place stricter servicing and policy requirements and may require personal guarantees.

Strict servicing and policy requirements can include:

  • Limiting maximum lends to between 60% – 80% LVR (depending on lending institution)
  • Require 10% liquidity (cash and shares) of the proposed investment value to remain in the SMSF post transaction
  • Calculate servicing without factoring in additional super contributions (above compulsory employer contributions of 9.5%)

Lending maximums, liquidity requirements, and serviceability calculations can vary greatly between lending institutions and impact the total amount you can borrow within a SMSF.

In an ideal situation, a property purchased in SMSF should settle in a similar timeframe to property purchased outside of super however, it is recommended you opt for a longer settlement period to ensure additional lending requirements can be comfortably met.

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While there are differences between standard and SMSF property loans, these differences are not prohibitive if you follow the borrowing process and can satisfy lending requirements.

If property in SMSF is something you are thinking about, our mortgage broker can quickly calculate your potential borrowing capacity.

2 Comments

Neil Geddes

Hi Alex, Is it possible to establish a SMSF with $100,000 or is it a legal minimum requirement for t to be $150,000?

admin

Hi Neil, thanks for the question. There are no legal minimums for establishing an SMSF, however, the administration costs associated with running an SMSF can outweigh the benefits for balances less than $150,000.

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