SMSF finance: 7 things you need to know
When applying for SMSF finance or an SMSF loan, keep in mind that your fund must have enough cash (including rent) and other liquid assets (such as bonds and shares) to cover loan repayments as well as administrative costs and income tax.
‘Getting it right first time can not only save money, it will put you in a good position to make it too’
1. Regulators – through lenders – have recently tightened lending criteria
With Australian regulatory authorities concerned about the fast growth of property prices in our largest cities, there’s been a recent crackdown on property investment lending. As a result, a number of banks and smaller lenders have tightened their Self Managed Super Fund (SMSF) lending standards too. Some have even completely stopped SMSF lending.
2. Lenders have reduced LVRs for SMSF finance
In response to concerns of the Australian Prudential Regulation Authority (APRA), Australia’s chief banking regulator, lenders have changed the way they’re handling loans for SMSFs. One of the ways they’re doing this is by reducing LVRs. A number of prominent banks, have also put a cap on what investors can borrow. Many lenders have stopped lendings to SMSFs entirely.
3. After property settlement, you must meet minimum cash requirements
Liquidity (i.e. cash in the bank or assets that you can easily and quickly convert to cash) can be challenging when you’re investing in fixed assets, such as property. Because it can take a while to sell a house and get the cash back in your bank account if you need it. Keep in mind that your SMSF must have enough cashflow (including rent) and other liquid assets (such as bonds and shares) to cover loan repayments as well as to cover administrative costs and income tax. With the recent crackdown, lenders will likely want to see two years’ worth of sufficient super contributions and / or they’ll want proof that your compulsory super guarantee is enough to cover repayments in addition to seeing that your SMSF has up to the equivalent of 1 year of cash available to cover any loan payments after you’ve settled a property.
4. Regulations prohibit you from topping up your SMSF loan amount in the future
The law governing SMSF’s essentially means that you can’t go back to the bank in the future and ask for more money if you need it, so it’s important to get the amount you need right before you start.
5. Redraw is not available for SMSF finance, but offset accounts can be very effective
SMSF loans do not allow for redraw of additional payments. However, you can benefit from an associated offset account. By linking this type of transaction account to your investment loan, your loan balance is offset on a daily basis by the credits in the account and can significantly reduce the interest you owe on the loan and allows you the flexibility to access any additional payments over and above the minimum.
6. The loan process is taking and typically takes much longer for an SMSF loan
This is true for a number of reasons. First, SMSF loan applications require a lot of time-consuming paperwork. Second, because of the regulatory crackdown, there are simply fewer lenders in the marketplace to handle the loan applications. Along those same lines, SMSF loans are specialised loans; a lender with specific expertise will need to review your loan application, which can take more time than your typical home loan review.
7. There are fewer lenders in the marketplace for SMSF finance
Some experts and lending institutions suspect that because of the new lending restrictions, there will be a slowdown in the number of people investing in property through their SMSFs. As a result, we may see more banks and lenders pull out of this area of the market.
ASIC publish a guide about SMSF and property too.
If you’d like to chat about finance, please contact us.View more