A self-managed super fund (SMSF) allows you to have control over how your retirement funds are invested. One option is to invest in property with the help of an SMSF home loan.
This means you use an SMSF to purchase an investment property, and that the rental earnings and capital gains are retained by your SMSF for retirement.
An SMSF home loan is different to a regular home loan in five key ways. Before you embark on this new investment journey, it’s important you understand the differences.
1. Limited-recourse borrowing arrangement (LRBA)
A LRBA allows a member of an SMSF trust to purchase an asset using a loan from a third-party lender. This asset gets held in a separate trust. If the trustee defaults on the loan, the lender’s recourse is limited to only what is in that separate asset trust. This shields the other assets within the SMSF from any liability. By contrast, regular home loans are full-recourse, which means lenders can potentially target any of the borrower’s assets in the event of a default.
2. Special requirements
Unlike regular home loans which allow a borrower to buy a new or existing home to either occupy themselves or rent out, SMSF home loans have certain requirements for the use of the property set out by the Australian Tax Office. The property must:
- Meet the sole purpose test of solely providing retirement benefits to fund members
- Not be acquired from a related party of a member
- Not be lived in or rented by any fund member or members’ relatives
3. Interest rates
Interest rates for SMSF home loans tend to be higher than standard home loans. The LRBA is a contributing factor to this as lenders are taking more risk on an SMSF home loan. How the property is used, residential or commercial, will also play a role in determining the interest rate.
4. Exit strategy
An SMSF home loan requires a clear exit strategy for how the loan will be repaid, particularly after retirement, to show lenders you have planned how you will manage the loan throughout its entirety. This strategy can include:
- Selling the property
- Downsizing to a smaller investment property
- Demonstrating your SMSF would have sufficient funds to cover future loan repayments
- Showing that you have dedicated reserves within the SMSF for this purpose
5. Use of a professional
Given the complexity of an SMSF home loan, it is highly recommended that you use a mortgage broker. At Just Imagine Finance, you will be assisted throughout the process, from ensuring you have gathered all the correct documentation to having all your SMSF home loan questions answered.
Investing in an SMSF home loan is a significant financial decision. Partnering with Just Imagine Finance can make this process smoother and more efficient.
Other considerations for buying property in an SMSF
Buying an investment property through an SMSF can have different tax implications than in a regular non-super structure.
For example, rental income is generally taxed at a lower rate if the property is held in an SMSF rather than outside super.
Also, if the property is sold after you reach retirement age, the SMSF is exempt from paying capital gains tax.
Would you like to find out more about an SMSF home loan? Just Imagine Finance can help you explore the best ways to get the most out of your SMSF. To get started, contact us on catherine@justimaginefinance.com.au or 0414 673 359.
