Borrowing in SMSF to purchase an investment requires following a strict set of rules.
Due to the risk associated with geared investments, your other investments held in the SMSF need to be protected. To achieve this, geared investments are purchased using a limited recourse borrowing arrangement (LRBA) and are held in a specific holding trust until the loan is repaid.
Even though your geared investment is contained in a specific holding trust, the SMSF will have beneficial ownership (meaning your SMSF will be credited with income and capital growth) of the asset while the trust has legal ownership. Legal ownership can be transferred to the SMSF once the asset is fully repaid.
The fact that this type of arrangement needs to be in place has two very important implications.
- The amount of paperwork required to setup a loan significantly increases
- To minimise their exposure to excessive risk banks and lenders are far more stringent in following due diligence procedures.
This makes the typical SMSF loan more difficult to setup compared to a standard mortgage and this should be accounted for when considering a property in super. A qualified financial planner can assist with the establishment of the trust structures.
For a more detailed discussion about property investing using your Superannuation funds, register for a Free SMSF Consult.