SMSF lending - Know your options

Lending options for Self-Managed Superannuation Funds (SMSFs) have been limited for a number of years, following adverse findings by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

With a sound understanding of the policy, requirements and processes lenders now have in place, however, SMSFs can still successfully achieve a good finance outcome.

Lending context

The Royal Commission findings saw a majority of lenders deem the potential risks associated with these products too high and they withdrew from the market.

While clients with existing SMSF loans weren’t ‘turfed out’ by lenders, they certainly couldn’t access competitive interest rates and in many cases, were effectively trapped in their SMSF loan.

At the time, there were fears that this shift in the market would see the end of SMSF lending altogether – in effect restricting SMSFs from property investment.

While there was plenty of noise in the media about this shift, a few options remained available in the SMSF broker market. With so much publicity around the regulations, potential risks and hesitation from lenders, many borrowers lost sight of the available options or viewed them as extremely complex or too difficult to achieve.

While it’s true that lending options for SMSFs are limited, understanding the process and the restrictions in place makes all the difference.

The main points to consider

Servicing

As with all loans, an SMSF loan cannot put the borrower in an adverse financial position. Lenders are also required to confirm that no individual SMSF member will be put in an adverse position by any new loan.

Some lenders will calculate servicing capacity within the SMSF as well as outside, in the individuals names, to ensure everything stacks up. Lenders will only take 70 to 80 per cent of expected rental income into consideration, providing a financial buffer should the property be un-tenanted at any point.

Lenders also consider SMSF contributions and will generally only accept a certain portion, in case income of the members, and therefore contributions, reduce. 

Liquidity

If the SMSF is purchasing its first property, most lenders will require 5 to 10 per cent remaining liquidity. For example, if the SMSF holds $200,000 cash prior to purchase, there must be a minimum $20,000 cash (10 per cent liquidity) remaining within the SMSF after settlement – borrowers cannot utilise all SMSF funds as the deposit. This liquidity requirement is generally not applied if refinancing and if the fund purchases additional properties.

Property type

Any SMSF purchase would be for investment purposes only. Whether it is a commercial or residential investment, the property needs to be unrestricted and able to be occupied by a tenant on an ongoing basis. For example, an apartment within a serviced hotel building with restricted or intermittent occupation and income would not meet this criteria.

Structure

It is important that any SMSF is established by a professional SMSF adviser. While there will be a trustee of the SMSF, you will also require a bare trust to hold the property with a different trustee. It is best to reach out to an SMSF adviser to work in conjunction with your broker to ensure the fund structure is compliant.

For the first time in a long time, a new lender has recently come into the SMSF lending market with a very competitive offering. I hope that this marks a change in this lending sector and that we’ll see more diversity in the market again soon.

In the meantime, there are definitely loan options to purchase and refinance within your SMSF fund. Get in touch to discuss what might be available.

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