Until the last week of September 2007, Self Managed Superannuation Funds (SMSF’s) could not borrow to invest in property, however that law has changed. SMSF’s are able to borrow as long as it’s via what’s called a SMSF Loan, which is internally geared and strictly regulated.
What do we mean by internally geared? This means that the SMSF is the borrower, and it alone is held responsible for making the loan repayments. This has the added benefit of not affecting your ability to borrow personally, outside of the SMSF. Of course, this also means that the SMSF has to have enough income in rent, and contributions, to cover the loan repayments for the property.
SMSF’s have always been strictly regulated to ensure that people are not just setting them up to access the money pre-retirement! Now that lending is also available, these regulations have been tightened up even more, and it is important that you have a full understanding of your rights and responsibilities before deciding if a SMSF loan is right for you. The ability to borrow involves the use of a bare trust and bare trustee company, these are specific structures that must be used for the fund to be compliant and GGA are market leaders in this area.
If you have at least $150,000 in superannuation you may be eligible for a SMSF loan so that you can buy property with your super. Most interest rates are only slightly (if at all) above the standard home loan rates outside of super, and with most loans you get all the bells and whistles that you usually would.
If you are considering a SMSF loan, there are ten steps that you need to consider:
Step One: Educate Yourself
Do your own research prior to engaging a professional to help you decide is this is the right thing for you. There are many articles and publications out there that are easily accessible, and informative, a number of which can be found under Resources...of this website.
Step Two: Speak to a professional about your suitability
Here are GGA SMSF lending is one of our specialties so you can come to us for any advice that you need. Before you begin looking at property we need to ascertain whether or not this structure is suitable, and manageable for you.
Step Three: Loan Pre-Approval
This is really important particularly if you have not yet got a SMSF and want to avoid the costs of setting one up in case you are not eligible and would not set one up otherwise. We can also arrange the mortgage broking for you, but we are equally happy to work with your mortgage broker, if you have one already experienced with this type of loan.
Step Four: Setting up your own compliant SMSF
If you do not already have one, the next step is to set-up your SMSF. If you have an existing fund, then we need to review the deed to ensure it has the ability to borrow, or if it needs to be updated. It is at this time that you also need to review your life & other insurance needs within your SMSF. There can be great tax advantages for you here, and we can assist you in setting this up.
Step Five: Bare Trust Trustee Company
The bare trust trustee company needs to be set-up, so that you are able to sign purchase contracts when you find a property you want to submit an offer for. This company can be set-up very quickly, if necessary.
Step Six: START LOOKING!
Once the above steps are taken, you can start looking! Ensure you stay within the pre-approval amounts given by the lender and is it vital BEFORE signing any contract that you speak to the professionals (us) about how to sign the contract and any clauses you need to include.
Step Seven: Obtain conditional approval
You will need to provide extra documents to the mortgage broker such as information on and assets and liabilities, bank statements, loan statements, rental appraisals, tax returns, credit card statements... etc. You will also need the contract of sale, Section 32 and if it’s a commercial property you will need the lease agreement.
Step Eight: Bare Trust
The Bare Trust now needs to be set up and this can take from a day or so to a week. This often surprises many people: the name of the Bare Trust will be the actual street address of the property you are buying. The bare trusts are a very specific type of agreement and therefore don’t have the same characteristics of a standard family or unit trust.
Step Nine: Awaiting unconditional approval
The bank will do their valuation and vetting of the deeds. If they are satisfied with all of the documents provided they will formally approve the loan and draw up the loan documents. At this point you also need to make arrangements to have the additional funds available, that will be required for settlement, this is done by your solicitor/conveyancer.
Step Ten: Settlement
You should regularly stay in contact with your mortgage broker and solicitor/conveyancer to ensure everything is ready for settlement. Finally, you have successfully purchased your first SMSF property...Congratulations!