If you’re looking to invest in residential or commercial property but don’t have the required deposit, have you considered whether accessing your superannuation money to get a loan may be an option for you?
If you have a self managed superannuation fund you may be able to use the funds to secure a loan, and you don’t need to be retired. Although there are risks and regulations to take into account, if you have a sufficient balance in your super, there may also be substantial benefits to a self managed super fund loan.
What is a Self Managed Super Fund (SMSF) Loan?
Setting aside money to fund their retirement is something most Australians now do, thanks to the compulsory employer contribution scheme the government set up in 1992. But it means many people have their money tied up in a ‘traditional’ super scheme and are unable to access it until retirement. While this may be the best option for many, if your strategy to fund your retirement includes property investment, not having access to cash reserves in your super can be frustrating.
The attraction of a private self managed super fund is that you get control over your investments. As with other superannuation funds, a self managed super fund provides benefits to its members when they retire. However, unlike other super funds the members of an SMSF are also the trustees, meaning they run it for their own benefit and are in charge of, and responsible for, the investment decisions. A SMSF can have up to four members, and they often comprise partners or other family members.
Benefits of a SMSF
- An self managed super fund gives you more control over the investments you buy (compared with non self managed funds).
- Legislation now allows people to access their SMSF to get a loan to buy an investment property. The asset simply sits within the fund (ie is owned by the fund once the loan is paid out) as part of your retirement income.
- With up to four members in a SMSF, you can pool together your super resources to purchase investments or provide a deposit for an investment loan. The members’ superannuation contributions can be used to help repay the loan.
- Business owners that want to buy a business premises but don’t have enough funds at hand for the required deposit may be able to use money tied up in their super to get a loan for premises.
- Any income an SMSF asset generates is charged at a 15% tax rate, which is essentially a tax advantage, since the outside company rate is 30%. If you were to sell the SMSF asset before you retire you get a concessional rate on your capital gains tax, and after you retire there is no capital gains tax.
What you need to watch out for
- Buying residential or commercial property through a SMSF can be great way to invest for retirement but you do need to have a sufficient balance in order to raise a deposit.
- There are regulations around the type of property purchased and who it can be leased or rented to. For instance, if you are intending to occupy the property with your own business, there has to be a lease agreement between the SMSF and the business entity to show that market rent is being paid. You also cannot use a property purchased through an SMSF loan as a holiday house or rent it to a family member.
- Time frames for transactions involving SMSF loans can take a little bit longer so you need to allow for an extended time period to arrange finance when you negotiate on a contract. Deeds will need to be reviewed by a bank’s legal team to ensure they’re compliant with SMSF legislation.
Qualifying for a SMSF
In order to qualify for a SMSF loan you’ll need to have a SMSF set up (and containing funds). Speak with your accountant to ensure first that a SMSF is suitable for you. If so, your Accountant (with help from your lawyer) can set up your SMSF.
Different banks have different requirements, but in order to qualify for a SMSF loan you need to have sufficient funds in your super. For this reason, often SMSFs are set up by partners or other family members to pool resources as one person alone may not have enough money for a deposit, stamp duty and other fees associated with purchasing residential or commercial property.
You also need to show you will have liquidity after you have purchased the property. Since superannuation is an investment to fund your retirement, the expectation is usually that you should have multiple asset classes in the fund to provide sufficient liquidity. Some banks will require you to have enough cash in your fund post purchase to make six months worth of repayments.
Ask your finance broker to seek an approval in principle from your lender, so you know how much you can spend on a property. The lender will want to know things like the type of property you’re looking to buy and what the income will be from the property (receiving rent may firm up the affordability of the loan). They may require you to obtain legal or financial advice to make sure you’ve satisfied yourself that a SMSF property investment is appropriate for your situation.
Most people have money tied up in super, and if they’re young (or not interested in retiring) think they can’t access this now. But if you have a SMSF you have control over your investments, and can use cash within your fund to apply for a SMSF investment loan.
So, if you’re a property investor or business owner and don’t have the deposit to buy premises or a property investment, you may still be able to get an investment loan by using money in your SMSF.