It is possible to get a loan to buy a property through your SMSF, but it’s a highly specialised and complex topic and strict rules apply.
Australian residents who currently have an SMSF, or are in the process of establishing an SMSF, can take out an SMSF loan to purchase or refinance a residential or commercial investment property.
Buying a property through an SMSF using an LRBA
All SMSF loans need to be taken out through a limited recourse borrowing arrangement (LRBA), which means that in order to limit the recourse of the lender, a separate trust and trustee have to be set up to minimise the risk to other assets in the fund.
In more simple terms, if the SMSF is unable to continue making repayments on the loan and falls into arrears, the lender will try and recover its losses by seizing the assets. Because the property is in a separate trust to the SMSF, the lender can’t pursue the assets in the SMSF which means the assets are protected from the risk of being repossessed by the lender.
There are a few things you need to consider before entering into an LRBA. These include whether the asset you’re using it to purchase passes the sole purpose test, if the loan can be sold to another party, and whether or not the SMSF can cope with an interest rate rise.
As well as using your SMSF to purchase an investment property, you can also use borrowed cash from an LRBA to pay for maintenance and repairs to the property that is part of the SMSF, however, you cannot use these funds to make improvements/additions to the property, such as adding a granny flat or an extension.
How does it work?
The actual process of buying a property through an LRBA isn’t too dissimilar to a regular property purchase, however, the difficulty lies in processing the application. If the loan application isn’t properly structured or compliant, there can be hefty fines of over $200,000 for trustees. This is why it’s strongly recommended to seek out the expert help of an accountant or mortgage broker.
This is generally how the application process works when purchasing an investment property through an LRBA:
You, the trustee, and other trustees (if applicable) find an investment property you want to purchase.
A custodian (also known as a bare trustee) is then appointed for the property. They hold the property title on the trustee’s behalf until the loan has been paid off.
You submit the loan application with all the documentation.
The custodian then has to issue payment for the deposit and the contracts for the purchase of the property are exchanged.
Provided the lender approves your loan application, the custodian will then put the property up as security with the lender so the transaction can be finalised, and pay the stamp and legal costs.
After the loan has reached settlement, you will start making the loan repayments and collecting rent. If the rent isn’t enough to cover the repayments, the difference must be made up from internal SMSF funds.
After the loan has been fully repaid, the title can be transferred from the custodian to the SMSF.
What do you need to do before you borrow?
It’s extremely important to seek out independent legal and financial advice about your SMSF borrowing money to purchase an investment property. Because SMSF loans are a very niche and complex topic, it’s important to make sure you understand the legislation around what types of properties you’re allowed to purchase, and what restrictions there are on the investment property. For example, if you’re buying a residential property as an investment, you’re not allowed to live in the property.
Which lenders offer SMSF loans?
There aren’t many lenders who offer SMSF loans in Australia anymore due to their complexity and small profit margins. At the time of writing, these lenders offer SMSF loans: