SO YOU’RE THINKING OF A SELF MANAGED SUPER FUND……..read our article to find out more!
So……you’ve heard all the stories from the media and your work colleagues about the benefit of using your Superannuation for the purchase of a home. Well it’s not quite as simple as you think…..
There is lots of legislation that is involved in running your own “Super fund”. This is a complex idea and does involve quite a bit of cost to set up, plus quite a bit of your time to manage. On the other hand, it can be an amazing opportunity to own a home, when all your normal attempts have failed. The main thing to remember is, you cannot live in the property. This is purely an investment only strategy, as the government policy states that it must be solely to provide retirement benefits to fund members. The property can also not be rented by a fund member or any related parties to the fund member – which supports our previous comment in regards to living in the property.
In addition to the information outlined in this article, SMSF’s are not limited to the purchase of property. If you prefer, there is the option of investing in managed funds and shares and becoming your own “fund manager”.
Setting up:
It is vital that you seek the advice of a qualified solicitor who is able to set up the fund correctly and arrange the suitable documents. It can be a very expensive exercise if this is not set up correctly, as the bank will reject your application and you will need to go back to the solicitor and amend the original documents. This then involves extra solicitor’s fees plus, you may end up missing your finance deadline. Finance is generally no less than 30 days, to allow for the banks solicitors to first approve the documents and then continue on the see if the finance can be approved. Most banks will allow you to borrow up to 80% of the property price, so your Super fund will provide the 20% deposit. The Super fund must also have enough funds to cover all the ongoing fees associated with having a SMSF. Initial consultation is vital to know whether you are in a position to set this up.
Acquire Money have prepared a brief outline as to who the players are and some basic requirements of a SMSF loan. We have tried to make an assessment of important benefits relating to each banks features and what we feel contributes to our pick of the bunch.
So, before getting to the “winner”, let’s review the features and the fine print…..
Super loans– features and the fine print
How much can I borrow?
Known as the ‘LVR’ or lending valuation ratio, you can typically borrow up to 80% for residential property if your fund has a corporate trustee, and 72% if your fund has individuals as trustees.
Eligibility
Some banks require all the members to be in the accumulation phase, others look for the SMSF to have a minimum net asset position (excluding the proposed property). You should check any eligibility requirements.
Servicing
Can your SMSF service the interest on the loan? Most banks count 80% of the net rental income from the property and any concessional contributions (up to $25,000). More enlightened banks consider dividend and other investment income in the fund.
Interest rates
Most banks use the ‘standard home loan rate’ for loans secured by residential property – some use business rates. Check carefully.
Mortgage Insurance
Typically not required, although some of the non-bank lenders require LMI if the LVR is 70% or more.
Offset account
A couple of banks offer an ‘offset account’ for residential property loans – this can be particularly cost effective for an SMSF that holds cash for liquidity or other purposes.
Application fees
Competition is bringing these down – for residential loans, these range from $350 to $1,500
Loan servicing fees
Typically, these are around $10 per month for loans secured by residential property.
Bank legal fees
Costs charged by the Bank to review your SMSF trust deed and (potentially) your property custodian deed. These range from $1,500 to $2,150, however they can go much higher. Some banks provide a “panel of solicitors” and/or offer a template of the custodian deed, which tends to drive these costs down. Our “endorsed local providers” list can provide you with a solicitor who can assist with SMSF information.
Independent Financial Advice
Most banks (not all) require the trustees to obtain advice from a qualified financial adviser to confirm that the loan is in keeping with the fund’s objectives and that the trustees understand the risks. If you haven’t got an adviser, this means an extra upfront cost.
Personal guarantees
Most banks will require the trustees (as individuals) to provide personal guarantees. If providing a guarantee, you may need to get independent legal advice.
And the winner is?
Competition is really increasing in this market and since we started surveying the banks, there has been considerable improvement in their product offerings. Application fees have been crunched, offset accounts are becoming more common, and LVRs are edging higher. Watch this space – it will change further over the next 12 months.
If you are in the market today for a loan secured by residential property, our vote goes to St George ahead of AMP, and then Bank of Queensland followed by Westpac. The offset account for us is a critical feature – the ability to save considerable interest expense by using this as your basic deposit account for your SMSF is a big plus. While the quoted standard variable rates of both banks are largely the same (St George 6.49% and AMP 6.50%), St George has lower fixed rates. With a little more experience in the super borrowing market, St George just edges out AMP – for now!
Natalie Carey
Acquire Money
Important: This content is for general advice only and is not tailored to the individual. It is important to seek professional advice from your accountant and solicitor before moving forward with any type of investment.
Credit Advisor
BLOG: Natalies Money Moments