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Australians buying property in their self-managed super fund can avoid borrowing from a bank by becoming their own lender, a financial adviser has suggested.
According to Dominique Bergel-Grant from Leapfrog Financial, buying property in your self-managed super fund is becoming increasingly popular but the borrowing costs associated with loans can be steep.
“A self-managed super fund loan through a normal lending institution will cost around 1.0 to 1.5 per cent more compared to rates you can get against your own residential property,” she said.
In addition, banks charge higher start-up fees for loans to SMSFs, between $2,000 and $2,500, according to Ms Bergel-Grant.
She suggested investors with large amounts of equity in their own home may be able to lend that money to their SMSF.
“Because the cost of borrowing through the banks with a self-managed super fund loan are so high, and because nine times out of 10 they'll ask you for a personal guarantee anyway, I would generally suggest waiting until you have sufficient equity in your own home to become the lender to your self-managed super fund,” she said.
Under this strategy, investors would borrow from a bank against their home or investment property at normal residential rates.
“Then you set up a proper lending agreement between yourself and your self-managed super fund. Your self-managed super fund then makes repayments to you and you can pay those on to your lender,” she said.
In her view, this can significantly reduce fees and interest associated with buying in your SMSF.
However, she warns investors to seek professional advice before pursuing this strategy.
“That's certainly something to think about and consider but it does need to be properly structured and I would talk to a lender about the opportunity cost, because you may want to use that equity for something else,” she said.