SMSF Home Loans
Must-read information for anyone considering an SMSF home loan.
Fact checked
Using your self-managed super fund (SMSF) to buy a property can seem enticing. However, it’s important to remember that superannuation is complex, and super-related loans have a lot of legal restrictions. In this article, we’ll give you an overview of how an SMSF home loan works, what the limitations are, and the tax issues you should know about.
Can I use an SMSF home loan to buy my dream home?
This is the first question most people ask, but sadly, the answer is no. Any property bought through an SMSF belongs to the fund, not to you as an individual, and has to be treated as an independent investment. That means you can’t live in the house, and neither can your family, friends, or co-workers.
Any rental income and the proceeds of selling the property belong to the SMSF. They are subject to regular superannuation restrictions, and you can only access them once you retire.
The SMSF also can’t buy any property you have owned at any time in the past, even if it now belongs to someone else, and it can’t sell a property to you. The same restrictions apply to your family and friends. You can only buy, sell, or rent the property on the open market.
The only exception to this rule is for commercial properties. The SMSF can buy, sell, or rent out commercial premises to a business owned by you, your friends, or your family, as long as it’s only used for business purposes.
How does an SMSF home loan work?
There are a few things you need to know about if you’re considering an SMSF home loan:
Limited Recourse Borrowing Arrangements (LRBA), bare trusts, fund liquidity, and contribution caps.
What’s a Limited Recourse Borrowing Arrangement?
Any money that an SMSF borrows must be in the form of a Limited Recourse Borrowing Arrangement (LRBA). If the SMSF defaults on the loan, the lender can seize the property to recoup their losses. But the LRBA prevents them from taking any other assets that belong to the SMSF, effectively protecting the rest of the fund.
The LRBA also restricts the renovations or improvements that can be made to the property. The SMSF can’t use the LRBA loan to make the changes. Any renovations have to be paid for by other sources such as rental income or your contributions. The SMSF also can’t alter the property so much that it becomes a significantly different asset to the one listed on the LRBA.
What’s a bare trust?
The loan is issued to a ‘bare trust’ or a custodian that holds the property title on behalf of the SMSF. The custodian can be anyone except the trustee of the SMSF. Once the loan has been repaid in full, the bare trust transfers the deed to the SMSF. Your accountant can help you set up the contracts so that you don’t pay stamp duty twice during this process.
It’s important to note that the bare trust only holds the deed. The SMSF is solely responsible for managing the property, collecting rent, repaying the loan, and dealing with the lender.
Liquidity and SMSF home loans
When an SMSF takes on a home loan, they must have some ready cash on hand so that they can make the mortgage repayments and make any necessary repairs to the property. If they fall short, they’ll have to sell some of the other assets they hold, potentially at a loss, to avoid defaulting on the loan.
Once the fund goes into the retirement phase, it’s legally obliged to pay you a minimum pension each year. If the fund doesn’t have enough cash to cover the pension, it may be forced to sell the property at a loss.
While you can put more money into an SMSF to cover any shortfalls, it’s critical to remember that you can’t take the money back out until retirement. Furthermore, there are restrictions on how much money you can contribute to super each year. If you go beyond the contribution caps, hefty tax penalties apply.
How contribution caps affect SMSF home loans
On top of the government caps that limit how much you can contribute each year, some lifetime limits also apply. So, while you may have extra money in your personal account, there are limits to how much you can put towards an SMSF home loan.
Lenders will assess your SMSF home loan application by considering the SMSF’s assets and investment income and your contributions. You may find that because of the limited contributions, you may not be able to borrow as much as you would like.
Furthermore, contribution caps can limit extra repayments on an SMSF home loan. For example, if you’ve already used up your contribution limits but suddenly have a windfall, you may not be able to put the extra money into your SMSF to pay off the home loan quicker.
What are the costs of an SMSF home loan?
Administration fees
SMSF home loans are no longer offered by the big four banks. While some smaller banks and other lenders offer them, they are a specialist product, and so there are usually application and lender administration fees involved.
Interest rates
Interest rate on an SMSF home loan is usually higher than a regular mortgage.
Accounting fees
You will also need to pay an accountant to draw up the paperwork, help you set up a bare trust, and fulfil the accounting and reporting requirements for the SMSF.
Trustee fees
If you are not managing the SMSF yourself, you’ll need to pay the trustee for the day-to-day management of the fund and the property.
Do I need a deposit for an SMSF home loan?
Yes, you do. SMSF home loans require a minimum deposit of 20%, and many lenders will request more. It’s not uncommon for a lender to require a 35% deposit. Low-deposit SMSF home loans don’t currently exist in the Australian market.
The good news is that you can use the money already sitting in your SMSF to pay the deposit, so you don’t have to use your personal savings.
What are the tax implications of an SMSF home loan?
SMSF home loans have different tax arrangements from regular mortgages. We’ve outlined some of the main ones below, but we recommend you speak to your accountant about how your tax return will be affected.
What are the tax implications of an SMSF home loan?
SMSF home loans have different tax arrangements from regular mortgages. We’ve outlined some of the main ones below, but we recommend you speak to your accountant about how your tax return will be affected.
Negative gearing
For tax purposes, you and the SMSF are two separate entities. This means you can’t offset SMSF property losses against your personal income.
Income tax
For an SMSF, all income, including rental income, is taxed at a flat rate of 15%. The rate doesn’t change, no matter how much you personally earn outside of the SMSF. Once the SMSF begins the pension phase, the tax on rental income becomes zero.
Capital gains tax
When an SMSF sells a property, the fund must pay capital gains tax (CGT). If they hold the proceeds of the sale in the fund for less than a year, then the CGT rate is 15%. If they hold the proceeds for longer than a year, the CGT is only 10%. If the property is sold when the fund is in the pension phase, the CGT rate is zero.
Pros and cons of SMSF home loans
PROS
LRBAs protect your super assets
If the SMSF defaults on the home loan, the lender can repossess the property but can’t touch any of the other assets in the fund.
Tax benefits apply
There are significant tax benefits on properties that are held through SMSFs.
Pool your purchasing power
If you can’t afford an investment property on your own, you can join with other members of the SMSF to collectively invest.
Use your super to pay the deposit
If you’re struggling to put a deposit together, you can use your superannuation to buy an investment property through an SMSF.
CONS
More expensive than a regular mortgage
The fees and interest charged on an SMSF home loan are higher than on a standard mortgage.
Bigger deposit required
SMSF home loans require deposits of 20-35%.
Contribution caps limit your options
Because the contributions you make to an SMSF have an upper limit, the amount you borrow, and how quickly you can pay it back, are also limited.
Lose diversification benefits
If you use most of your super to secure a property, you may not have enough super left to invest in other things, effectively putting all your eggs in one basket.
More paperwork required
SMSF home loans are more complex and require more paperwork than a standard mortgage. We suggest using an accountant to make sure the agreement is structured correctly, or you could be fined for breaching superannuation laws.
No redraws available
Once you put money into super, you can’t access it until retirement. For this reason, SMSF home loans don’t offer redraw facilities.
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