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With rates impacting borrowing capacity, more property investors are considering options to buy through their SMSF. Here’s what brokers need to know about SMSF lending.
As property prices soften and rental yields grow, investing in property is an increasingly attractive proposition. However, interest rates and the cost of living have gone up – putting pressure on borrowing capacity.
According to CPA and financial planner Michael Berman, this means it’s potentially easier to borrow in a self-managed super fund (SMSF) than as a personal investor – but many people aren’t aware this option is available to them. And for mortgage brokers, the added complexities of structuring an SMSF loan may feel challenging.
That’s why Michael mentors mortgage brokers through the SMSF loan process – so they can feel fully educated on the rules around SMSF borrowing arrangements to guide their clients.
“With SMSF loan serviceability, lenders look at employer super contributions, income from other assets held in the fund, and rental income from the property. They don’t consider personal debts or living expenses. With rental incomes and employer contributions going up, it is actually getting easier to borrow in an SMSF – and I think that’s what will drive lending growth this year,” he says.
The SMSF shift
SMSFs now make up a quarter of all super assets, as a growing number of Australians choose to take control of their retirement savings. Between 2013 and 2021, the value of assets held under limited recourse borrowing arrangements (LRBAs) grew to $59.7billion – a 578% increase. Over 95% of those LRBAs are used to buy residential or commercial property.
Assetline Capital introduced a specialist SMSF Horizon Mortgage in late 2022 and is seeing growing interest from SMSF members across both residential and commercial investment properties.
Michael says there are a few factors driving the recent growth in both SMSF establishments and property investments.
“First, finance is more available with lenders like Assetline Capital coming into the market,” he explains. “The long-term growth prospects of Australian property also align well with super’s long-term goals, and there are added tax benefits – especially for owner-occupied commercial property.”
Asset protection is another factor. In the event of personal or business difficulties for the borrower, the property is protected from creditors within an SMSF. Plus, the nature of an LRBA means the lender does not have recourse to other superannuation assets if the loan defaults.
And finally, the SMSF gives borrowers a separate source of borrowing capacity. “Borrowers can use their employer super contributions to pay off an investment property loan – which can make all the difference in today’s tight lending environment,” says Michael.
Know the rules
It’s important to note only licenced financial advisers can make recommendations about gearing a property within an SMSF, so mortgage brokers need to tread carefully around giving advice.
They also need to understand what borrowers can and can’t do with that property and funding structure, to avoid potential penalties or disappointments down the track.
“An SMSF loan needs to be structured correctly, which should be set up by a solicitor before you rush to get a funding deal through,” says Farrel. “And there are a few things an SMSF loan can’t do; repayments can’t be interest only, the fund can’t cash out equity to fund renovations and if it’s a residential property, it cannot be owner-occupied.”
Michael notes this is the key difference between investing in residential or commercial for an SMSF.
“SMSF members and any related parties can’t lease or live in a residential property. If it’s a holiday house, they can’t use it. If, for example, they wanted to live in the property after they retire, they could transfer it to themselves personally at market rate – but that would trigger stamp duty.”
Commercial properties are exempt from this rule, and a SMSF member can even sell their existing commercial property asset to their fund. And this makes commercial properties a highly tax-effective SMSF investment option – especially if the fund’s members include business owners.
“Super probably has the best tax benefits of any vehicle you can own an asset within,” says Michael.
Firstly, SMSFs pay a lower tax on rental income (between 0% and 15% depending on the fund’s status). If it’s an owner-occupied commercial property, the business owner can simultaneously claim a deduction for the rental they pay into their own fund at 25%. They can also make tax-effective concessional contributions to their super (subject to caps) to pay down their loan faster.
If the property is eventually sold, SMSFs enjoy a generous capital gains tax discount.
Choose the right partners
Given the added complexity around SMSF loan applications, it’s a good idea to work with a licensed financial adviser in your network. And when it comes to choosing the right lending partner, Michael says brokers should consider three important attributes.
- Serviceability requirements – is there a minimum fund cash balance? How do they assess income across different assets held within the fund? This will impact borrowing capacity.
- Ease and responsiveness – how long will it take to close the deal? You don’t want your client stressing over settlement.
- Affordability – what is the interest rate? While SMSFs will pay a higher rate than personal borrowers, Michael says the gap is narrowing and this should not be the primary decision factor.
Farrel says his team looks at full financials for the SMSF, including the consistency of super contributions over a two-year period. They also assess the property’s projected rental income and apply an appropriate deeming rate to determine income from other assets including cash and equities.
As long as there is enough income to service the SMSF loan, they do not need to assess personal finances including expenses.
With the appetite for SMSF borrowing against property, likely to continue to grow this year, Michael believes, “It might be one of the only ways some people can borrow to buy a new investment property in this market. Brokers will play an important role in discussing the finance availability and servicing requirements of a SMSF loan when discussing loan options with the right clients.”
Learn more about Assetline Capital’s SMSF Horizon Mortgage, or get in touch with their team.
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