A number of lenders have left the market, so where does that leave DIY’ers looking to borrow in super?
I was speaking with a friend earlier this evening who is an experienced mortgage broker working in the SMSF lending space. It seems that similarly to credit markets generally, there has been further tightening on SMSF loans, with many lenders no longer offering them.
SMSF loans are generally under a limited recourse borrowing arrangements (LRBA), used to purchase residential and non-resi property within Australia. Because of the arrangement, typically lenders have had more conditions attached to the loans, seeking greater security and this has increased over time.
To my recollection, it’s more than a year since many of the big players announced departure from the LRBA space and loan to value ratios decreased (down from a maximum of c. 80%) and minimum liquidity requirements were enforced by some lenders.
What I now understand from my broker is that a lender he has continuing dealings with, require the loan to be serviced by rent and Super Guarantee contributions (SGC) which must be directed to the SMSF. That means if the members SGC cannot be directed to the Fund, perhaps because of their employment arrangement, then the condition cannot be met and the deal falls over.
Another issue my broker raised is one of security title (for apartments). Prior to strata title the only way to purchase part of a property in NSW was through company title. It’s prudent to check with the broker whether the prospective lender will accept the specific security you’re thinking of buying, it could be another deal breaker.
The point being that whilst SMSF loans are still available in the marketplace, there is a smaller pool of money, fewer lenders offering these loan facilities and more hurdles to pass through.
What should you do BEFORE selecting a property to purchase through your SMSF?
- Speak to your financial adviser and mortgage broker to ensure an SMSF gearing strategy is right for you and your Fund. Or continues to be appropriate if the plan was prepared some time ago.
- Know the numbers – carefully evaluate the property purchase proposal in your financial plan. It will set out the budget you have to work with and the metrics to look for in your purchase.
- Ensure you understand the Fund cash flow thoroughly and include any projected contributions, income and expenses.
- You must be comfortable that the Fund can support repayment of the proposed loan. If there isn’t enough money in the bank account to cover repayments and other costs as they fall due, members will need to make personal contributions to cover the shortfall. Note, contributions caps apply each and every financial year.
- Carefully consider any upcoming changes in your personal circumstances that may affect the strategy. Is it a deal breaker?
- Ensure the Funds income tax returns and financial statements are up to date.
- Ask your mortgage broker direct questions about the terms and conditions as well as special conditions you/your SMSF may be subject to. It is the broker that knows the lenders products, pricing and processes.
- Have supporting evidence for the loan application ready.
- Do some market research or hire a buyers agent.
- Understand the law, rules and complexities of buying property in super using an SMSF loan. If you cannot do it yourself, appoint qualified specialists to assist you.
- This is not an exhaustive list, speak to your advisers again (including your lawyer) and build a to do list AND a not to do list.
What shouldn’t you do?
- Rush out a buy the first property you see without first seeking advice, a loan pre-approval and having checked off your to do list.
- Buy at auction or off the plan without carefully evaluating how you/your Fund will pay for the property if you don’t get a “yes” to your SMSF loan application.
- Buy the property in your name thinking you can easily transfer it to the SMSF at a later stage.
- Agree to a short settlement period. LRBA’s take longer due to their complexity.
- Again, this is not an exhaustive list!