SMSF – Applying For a Loan

Applying For a SMSF Limted Recourse Borrowing Loan

A financier will require documentation to support your loan request. Remember that whilst the Property Trustee is the beneficial owner of the property, it is the SMSF that is applying for the loan


Banks and other financiers assessing your loan will review the following items to ensure there are sufficient funds available to repay the loan:
  1. Your superannuation contributions over the past 2-3 years
  2. Any rental income from the property, past, present or proposed
  3. Your ability to increase your contributions from salary or profits of your business
  4. If buying a commercial property with your business as a tenant – does the rental proposed match with prevailing market rents in the area and can your business support the level of rental to be paid.

  5. Other assets providing income in the fund – for example do you receive interest or dividends from cash or shares currently held in the fund that will remain there after the purchase.

You may also find that some banks will have limits on how much you can borrow, usually minimum amounts, but also how much money you need to have left in your SMSF AFTER the loan is provided and the property purchased. For example, some banks want you to have $150,000 in assets left in the fund after you have purchased a property using a loan. Some banks want you to have a minimum of $150,000 in existing Super Funds in order to complete any transaction.


Types of Properties (Banks Like)

Let me make a distinction here. I am talking about properties that a bank will let you borrow money against to purchase in your Superannuation Fund. You MAY buy another type of property once you have checked with your financial adviser or accountant, however, simply because the legislation allows it, does not mean a bank will finance the purchase. Remember that banks have Limited Recourse to the asset as part of their loan. So, in essence they will not want to take a high risk on the purchase of these properties. You can however be reasonably confident of being able to purchase:

  1. Detached Houses in Capital Cities and Major Regional Cities (In QLD, Mackay is a major City but Longreach is not)
  2. Residential Units in these locations however the borrowing limits may be reduced
  3. Retail Commercial Property – shops and buildings containing a number of shops
  4. Commercial Offices and Freestanding Commercial Buildings
  5. Light Industrial – Warehousing with offices

The types of properties banks do not like financing are:

  1. Income producing rural properties (although they can be financed, just at a lower borrowing amount)
  2. ‘Smelly’ industrial properties – think paint, sandblasting, chemicals, waste, oil, gas etc. Any kind of building with an industry that could be a hazard to you or the environment and might require certain permits and licences to operate.


How Much Can I Borrow?


Residential Property

Most banks will lend up to 80% against residential property. Just remember that the rule is ‘up to’, not ‘always will’. Some factors that may decrease the amount available relate to properties such as

  1. One residential unit in complex of 80 units
  2. Location of the property
  3. Condition of the property
  4. Market volatility noted by valuers
  5. Brand new houses in housing estates that have not been tested in a secondary sales market (display homes etc)

Commercial and Industrial Property

In general, 65% of the property’s value is the most that the major banks will let you borrow. Some smaller banks and other financial institutions will let you borrow up to 70% on a commercial property purchase. Again, there are always conditions which may mean the bank reduces its maximum borrowing limit for the property you intend to purchase. Most of these conditions will relate to the location of the property, its ‘saleability’ and comments made by valuers with respect to the market overall as well as the local conditions. To be on the safe side, you really should decide if you can put in up to 40% deposit on a commercial property before proceeding. There is no point having documents drawn up and paying a raft of fees to lawyers and other advisers, only to find out that you cannot have your loan approved due to lack of funds. Remember also, that you need to allow for Government Stamp Duties and other fees and charges from the funds you have available.


Summary

  • You can buy numerous property types in a Super Fund, however banks will only provide financing for some of them.
  • Banks like ‘vanilla’ properties in good locations.
  • Banks don’t like risky, dirty, smelly properties that may be difficult to sell.
  • The maximum borrowing on a Residential Property is 80%.
  • The maximum borrowing on a Commercial or Industrial Property is 70%.
  • Comments on location and the general and local market will have a big impact on the banks willingness to provide you the money.
  • If you cannot afford to put in a deposit of 10% above the maximum (ie. 30% on a residential property instead of 20%) then perhaps do not proceed as you may waste money on fees and legal costs.

On the final page, you can learn about
HOW bank assess your SMSF loan

 

 

 

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