SMSF – How Banks Assess Your Loan
Income Assessment for SMSF Loans
In general terms, you need to think about the income that is currently entering your superannuation fund. These income types might be:
- Residential rental income from property
- Commercial rental income from property
- Current contributions from your employer or yourself
- Interest earned or dividends paid on any investments held by the SMSF (shares or cash or managed fund returns)
It is these income sources that banks will use to assess your loan. They will not assess the loan based on your personal income despite the fact that they may still take a personal guarantee from the members of the fund.
As an example, let’s say you own a business and you are buying the commercial property of which you are a tenant using a loan via your SMSF.
Here is how a bank might assess this:
- The commercial rent you are paying via the business and/or the rent you intend to pay
- Contributions to the fund that you have been making over the past two years (an average of these contributions is taken)
- Investment income such as interest or dividends received over the past two years.
If you intend to increase your rental payments to the SMSF, the bank will want to ensure you can afford this and will want to see your business financials. Also, they will want a valuer to comment on the rental payment proposed and whether this is within current market proposed. – ie current market rent dictates $600 p/w and you are proposing $1000 p/w
If you intend to increase your superannuation contributions above your current payments, the bank will want to check your financials to ensure the business can sustain these payments. If you are a PAYG employee they may also ask to see a copy of the statement of advice from your financial planning which sets out a budget and advice on increasing these contributions.
It’s likely that the bank will apply a ‘deeming’ rate to the returns expected from your other investments. This may be as low as 4% despite the returns posted in the past. – example.
Your investments might have returned 9.5% in the past financial year however the bank will apply a ‘deeming’ rate of 5% and use this rate as your projected income on your investments.