Borrowing Money as the Trustee of a Self-Managed Super Fund
Those with superannuation can create self-managed super funds (SMSFs). The SMSF acts as a trust to help manage superannuation. SMSF owners receive employer contributions and can place more money in the fund. In this respect, an SMSF is like a regular super fund.
The difference is that an SMSF trustee has more control. In particular, the trustee can decide where the SMSF funds get invested.
Many use an SMSF in tax planning or with retirement purposes. Some also borrow against the SMSF.
What Can I Borrow?
A professional can help you apply for several loan types with an SMSF. These include the following:
• Standard Investment Home Loans: Most lenders restrict this type of loan to 75% of the value of your home. It is possible to get loans up to 80% with some specialist lenders. If your SMSF meets the lender’s criteria, you may be able to access larger loans.
• No Income Evidence: Having no evidence of income can prevent you from getting a loan. Some lenders can help. However, you need to comply with several restrictions.
• Discount Loans: Lenders will often levy margins on SMSF loans. This can make them less attractive than regular home loans. Margin size varies between lenders.
• Commercial Property Loans: You can borrow up to 70% of a commercial property’s value using an SMSF. This applies to non-specialised securities only.
• Unusual Income and Securities: Most lenders will be wary of SMSFs with strange income and security types. There are a small number of specialists who can help.
• Bad Credit: A few lenders offer bad loans using SMSFs. You can access a maximum of 80% for home loans and 70% for commercial loans, though this varies depending on your situation.
The Big Hurdle
Banks want to see the SMSF receives regular income before offering a loan that uses the fund. This is the major issue that trips up most people applying for SMSFs loans.
Most lenders examine the SMSF’s tax returns from the previous two years. Using these numbers, the lender figures out if the trust’s income will cover the debt created by the loan.
In some cases, a lender may consider the personal income of the SMSF’s members. As such, you may consider offering a personal guarantee on top of the SMSF to get your loan.
Are There Restrictions?
SMSF loans have several restrictions attached. Most lenders will not offer the following:
• Refinancing of a current SMSF loan.
• Funding for construction. You can use an SMSF to pay for construction work. However, you cannot use any money borrowed against the SMSF for this purpose.
• Selling an owned property to the SMSF.
• Buying a property that you intend to live in using the SMSF.
You may also need to meet various liquidity requirements for an SMSF loan. These vary depending on the lender.
Lending to a Bare Trust
In rare cases, you can access lower interest rates with lenders who will lend to the trustees of holdings or bare trusts. You can also access a better Loan-to-Value Ratio (LVR) with this method.
There are differences between this type of loan and an SMSF loan. Lenders refer to loans to SMSF trustees as “borrowing money”. This is because the SMSF trustee does not hold a legal obligation over any property bought using the loan. Lenders use the term “maintaining a borrowing” to refer to loans to holding and bare trust trustees. This indicates a higher level of personal interest in the loan.
To access a holding or bare trust loan, a trustee must meet several requirements. He or she should sign an agreement with the lender. This ensures compliance with the SIS Act. The trustee must also direct a company or be a company in its own right. Lenders use company figures to determine how much the trust can borrow.
Can You Get Approval?
It is best to talk to an expert. SMSF loans are not simple constructs. A mortgage broker or accountant can help you work through the general information provided here. They will also provide advice based on your current situation.