Self-managed super funds (SMSFs) have become increasingly popular in Australia to manage and grow retirement savings. What a lot of Australians don’t know is, you can increase the asset exposure in your super fund with SMSF lending.
If you are looking for new ways to invest your superannuation money, this blog is for you. In this article, we will discuss the important aspects of SMSF lending in Australia, including what SMSF lending is, types of SMSF loans, loan-to-value ratio (LVR), and eligibility.
What is SMSF lending?
Self-managed super funds (SMSFs) lending is a way for people to use their superannuation to invest in assets such as property.
By taking advantage of SMSF lending, the investor can receive a steady source of income while growing their capital, but it does come with its risks. SMSF lending has strict regulations to ensure your money will be used for legitimate investment purposes and to ensure the loan can be paid off.
Limited recourse borrowing arrangements (LRBAs)
Limited recourse borrowing arrangements (LRBAs) are the most common type of SMSF lending method. The loan allows borrowers to purchase assets while using the asset as security. If the borrower defaults on their loan, the lender’s recourse is limited to the asset that was purchased for the loan.
For example, if you defaulted on your purchase of an investment property, the lender could repossess the property, but they wouldn’t be able to claim any of your other SMSF assets.
As the level of security is limited, borrowers are subject to higher deposits.
The loan-to-value ratio (LVR) is the ratio of the amount being borrowed to the value of the property being purchased. In Australia, the maximum LVR for SMSF lending is generally 70%, meaning the SMSF can borrow up to 70% of the property’s value.
For example, if the SMSF wanted to purchase an investment property worth $500,000, they can borrow a maximum of $350,000 from the bank. They are required to deposit 30% of the property’s value ($150,000).
Compared to other forms of lending, SMSF is considered risky. As a result, the LVR is generally lower, requiring a higher deposit. Lenders will also consider other factors such as the SMSF’s assets, liabilities, income, and expenses, that will determine the maximum LVR.
Eligibility for SMSFs can be difficult to understand as there are numerous rules and regulations that are required to follow. Here is a quick breakdown of the criteria you are required to follow.
The SMSF must comply with all tax and super laws and regulations, must have sufficient cash flow and assets to support the loan, and must prove the loan is being used on an appropriate and legitimate investment. Additionally, lenders may also require a personal guarantee and a minimum net asset value in the SMSF. Before applying for SMSF loans, we recommend speaking to a professional to ensure you meet the eligibility.
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