SMSF Loans Comparison Service

Limited Recourse SMSF loans borrowing arrangement

If the SMSF has sufficient funds to put down a deposit, the remainder of the purchase price can be borrowed. The SMSF can borrow either from a financial institution (a bank or a credit union for example), or from the Fund’s Members. Loans are set up with non-recourse borrowing arrangements. This means the lender has no right of recourse on any other assets in the SMSF. For this reason, the lender (the bank) will ask the Members for a guarantee. This arrangement is generally referred to as a limited recourse borrowing arrangement.

The SMSF provides the funds for a partial payment on the property and pays all the relevant fees. The SMSF will borrow to settle the balance. If the SMSF pays a larger deposit on the investment property, the bank may waive its requirement for security from the Trustees. The property will be the sole security for the loan under this limited recourse loan agreement. In the event of default, the lender only has the right of recourse on the property; there is no right of recourse on other assets held in the SMSF.

As a general rule-of-thumb, if the bank is SMSF lending 80% of a residential property’s value, it will ask the trustees for a guarantee. The bank will not normally ask for a guarantee when the loan-to-value rate is 60%. For commercial property, these percentages are 70% and 50% respectively. In assessing the need for a guarantee, the bank will take into account the condition of the property, the credit history of the borrower, and the expected income from rental.

Ownership

The investment property is owned by the bare trust with the SMSF having an entitlement to it as a beneficiary. The bare trust is merely the title holder until the loan is paid off. The SMSF will receive lease payments from the lessee and will expense the interest paid on the SMSF loan. After the loan is repaid, the SMSF has the right – but not the obligation – to acquire the legal ownership of the investment property.

Related Parties & SMSF Home Loans

When purchasing a residential property, the SMSF is forbidden from having any dealings with a related party. This means that members of the Fund cannot sell their own houses to the SMSF. The Fund is also forbidden from renting the property to a Trustee, a family member, or a parent-in-law. Trustees can, however, purchase the property from the SMSF when entering the pension phase.

Bank Information & SMSF Home Loans

You are free to use any bank or lender when arranging finance for your SMSF property purchase. To get the best deal possible, you’d be well advised to use a mortgage broker. You can use a big bank or one of the niche players like Macquarie who, by the way, have a very informative free brochure with some great examples.