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Buying property and borrowing in your SMSF has fast become a growing topic of interest among serious property investors. To accommodate the interest, the scope of lending options has also become wider with more banks getting on the bandwagon. Whilst this has allowed for a greater choice, it also means that investors need to know all the different credit hoops to jump through.
Blogger: Mary Sartinas, Affiliate Finance & Property
The following tips will highlight what to lookout for when applying for finance in a SMSF structure.
Whilst the banks won’t all necessarily ask upfront whether you have considered the suitability of borrowing in your SMSF, it’s expected that you’ve undertaken your own due diligence. In saying that, don’t be surprised, if a certificate of financial advice appears in your loan offer documents.
TIP: Make sure you have met and discussed your investment strategy with an accountant and / or financial planner licensed to discuss SMSFs prior to buying the property.
Most investors won’t even think about the aspect of “servicing” until the application has been lodged to the bank, however, this could pose a “make it” or “break it” for the deal. There are two methods for assessing serviceability and it all depends on the lender's policy as to which one will apply to you. The first assessment method relies just on the income derived by the SMSF to service the new loan. The second and more complicated method requires the individual member to demonstrate their ability to continue servicing their existing commitments using that lender’s assessment on top of the SMSF’s capacity to service its new loan.
TIP: Engage a suitably qualified finance broker to do the preliminary calculations for you. This might even mean getting a pre-approval for added peace of mind.
Corporate versus individual trustee...? It’s not something that investors decide to set up with the bank in mind, however, the structure of your SMSF will determine the loan to value ratio or the LVR to which the lender will extend their funding. When the security is zoned residential, most lenders will lend up 70% when the trustee is individual and 80% when the trustee is corporate.
TIP: Work out the difference 10% could make to the end result. If making a greater contribution from the funds in your SMSF leaves you with insufficient cash to cover the ongoing costs of managing the SMSF, and your preferred lender will extend to 80% against a corporate trust, then perhaps you may need to revisit your structure.
Another factor that will affect your LVR is the zoning of the property. Typically under a corporate structure, lenders can extend to the following LVR’s:
• Residential: 70% - 80%
• Commercial: 60% - 70%
• Rural: 50% - 60%
However, there is also a separate category for specialised security, which is not quite black and white and needs to be reviewed in line with the individual lenders policy. For example, properties under 50m2, inner CBD postcodes, studio / student accommodation, serviced apartments, resort residential, properties over 50 acres are amongst just some of the specialised securities.
TIP: Before committing to the purchase, make sure that your preferred lender will accept the property and where possible, order the valuation upfront to determine any possible risks.
Whilst the lenders’ credit guidelines may appear rather complex, the most important tip of all is to discuss your finances with a suitably qualified adviser prior to making any financial commitments to purchase a property in your SMSF.
About Mary Sartinas
Mary Sartinas is a director and principal adviser at Affiliate Finance & Property, a leading Australian finance broking firm.
Over the last 20 years, Mary has become the trusted adviser to thousands of successful property investors, assisting them on their finance journey.
Her clients understand that having the right strategies, setting up the correct structures and engaging a team of experts are the keys to building a thriving property investment portfolio. Mary has also been an active property investor for almost two decades and shares her knowledge and experiences from the stage, where she is she is a regular speaker.