You may have heard of SMSF loans as a way to borrow money against your self-managed super, but how much money can you access in this way, and what sort of restrictions will you need to consider? Read on to discover more.

SMSF loans and borrowing

You generally won’t be able to use an SMSF loan like you would a standard loan. In other words, you won’t simply be able to borrow money directly from the fund to use in any way you wish or use the SMSF as security for other borrowing arrangements. Instead, SMSF loans follow a stricter set of rules.

Generally, when you borrow with a self-managed super fund, you will be using the capital to buy property – specifically, an investment property that will become an asset within the SMSF itself. The idea is not so much to leverage money from the SMSF but to make strategic investment decisions that support the SMSF trustees and fund members in the long term.

The SMSF can be used to borrow funds for this purpose, but the mortgage or home loan cannot be held in the name of the SMSF itself. Instead, a bare trust will be set up, and the mortgage will be held by this trust. All beneficiaries of the SMSF will be able to leverage the fund growth, even if they are not part of the bare trust. Trustees may also use a limited recourse borrowing arrangement (LBRA) to purchase assets for the fund.

Limits on borrowing with an SMSF

There is no general monetary limit attached to an SMSF home loan. However, there are restrictions relating to the LVR – or loan-to-value rate. When you borrow money using an SMSF, you will usually only be able to borrow up to an LVR of 80%. This means 80% of the property’s value may be made available in the form of a loan – although this may differ between mortgage providers.

The rest will need to be made up by a deposit. The greater the deposit you can raise, the more you will be able to borrow.

Other restrictions may also be applied. You will probably need to find a specialist lender, for example, as not all lenders will be able to offer an SMSF loan. In addition, some loan providers will require that you maintain a specific balance within the SMSF for the duration of the loan term – the provider may carry out their own calculations to decide what this balance should be.

Finally, the lender may require that you maintain a set proportion of liquid cash within the SMSF’s investment mix, in order to service loan repayments and other costs if required. This may be the case even if you have factored rental income into your investment strategy, as the lender will still be likely to require some sort of guarantee that the trust will be able to service the loan on an ongoing basis.

How much can you borrow from a SMSF

The cost of borrowing with an SMSF

Bear in mind that you will need to cover the whole cost of the transaction when you decide to buy property with an SMSF loan. While the property loan amount will be limited to a percentage of the total property value, there are other factors to consider, such as stamp duty and other fees that are incurred during the property purchase.

You’ll also need to think about interest rates on top of the regular loan payments. As interest rates are currently increasing in Australia, you may decide to opt for a fixed rate or pre-approved rate on the loan, but you’ll still need to cover these payments for the full term.

Why choose an SMSF loan

There are many reasons why SMSF trustees may choose to take out this kind of loan.

  • It can provide strategic investment advantages for your SMSF, leading to retirement benefits further down the line as the fund grows.
  • There are tax benefits too – as SMSF gains are taxed at a concessionary rate of 15%, property investors may choose this type of loan to reduce their taxable income.
  • There is a degree of flexibility – you can buy commercial or residential property, according to your investment strategy. Bear in mind that lenders may apply a stricter LVR limit on commercial properties.

Explore your SMSF loan options with Sydney Brokers

An SMSF loan may require a specialist lender. Fortunately, at Sydney Brokers, we can help you make the right choice. We’ll connect you with all the options you need. Reach out today to get started.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.