What is an SMSF loan?

Couple considering an SMSF loan.

Many Australians rely on self-managed super funds (SMSF) to save for retirement. But did you know you can also tap into your funds to invest in property? An SMSF home loan lets you use your retirement cash as a deposit, giving you the chance to purchase a property you might not have means to purchase outright.

First of all, what is a self managed super fund?

Unlike an industry or retail super fund, which manages your investments for you, an SMSF gives you control over how your retirement savings are invested. It also falls on you to make sure the SMSF abides by tax and superannuation laws.

Managing an SMSF requires a great deal of time and knowledge, and there’s always the risk that your fund will underperform. For this reason, it’s a good idea to speak to an accountant or financial advisor to determine if an SMSF is right for you.

How does an SMSF home loan work?

An SMSF loan lets you leverage the funds in your self-managed super fund to purchase an investment property. Any rental income or capital gains from the property are reinvested, and can only be accessed at retirement.

Strict conditions apply when using your SMSF to purchase property. They are:

  • The property must be used solely to provide retirement benefits to fund members
  • The property must not be acquired from a related party of a member
  • A fund member or related party cannot live in the property
  • A fund member or related party cannot rent the property.

As a rule, your SMSF must pass the ‘sole purpose test’ if it is to be eligible for the usual super fund tax concessions. This means it cannot be used for any other purpose besides providing a retirement benefit to you and other members.

If you reside in the property or receive income from it, this is considered a pre-retirement benefit. The Australian Tax Office explains that this is a serious offense, and can result in civil and criminal penalties.

How do I purchase a property through my SMSF?

Before you get started, it’s recommended you speak to a legal professional with expertise in SMSF lending. They can help you plan your purchase and make sure the SMSF complies with all legislative requirements.

When it comes time to submit a home loan application, be sure to weigh up your options carefully. Not all lenders offer SMSF loans, and the ones that do tend to charge higher rates than traditional home loans. 

You should also take extra care when filling out the property loan documents and contract, as you won’t be able to change the terms of the loan once everything is finalised.

If your application is successful, a custodian will put up the property as security with the lender. The loan is a limited recourse borrowing arrangement (LRBA), which means the lender is not entitled to any other assets held in the SMSF if the loan defaults.

You will need to make sure the SMSF has enough money to cover repayments, not to mention stamp duty, insurance and maintenance costs. If the property is rented out, the rental income must go towards paying off the loan and cannot be pocketed.

Once the loan balance has been paid off in full, the legal title to the property will be transferred from the custodian to the SMSF. At this point, your fund can continue receiving rental payments or the property can be sold off.

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