Rules on Self-Managed Super Fund Loan (SMFS Loan) are ever-changing and can confuse people. If you are securing this type of loan, it is important to talk to an expert first. There are legal aspects to consider and strict regulations to follow, such as the prohibition of directly providing loans to SMSF members/trustees.
Here are the basics:
How Does It Work?
The process starts with the SMFS trustee taking out a loan from a lending institution. With the borrowed funds, he can proceed to buy an acquirable asset or multiple units of identical assets with similar market value if he wishes.
These assets are then held in a bare trust. Any returns gained from the investment are added to the trustee’s SMSF account.
Can You Borrow Against your SMSF?
No, this is prohibited.
Your SMSF cannot lend you money, or your relatives for that matter. Any attempt of making such type of loan is prohibited, as provided for by Section 65 of the Superannuation Industry Act 1993. The Act prohibits superannuation funds from lending money to members and/or their relatives.
Property Investment – How Much Can You Borrow?
For standard SMSF investment loans, borrowers can get up to 80% of the property value. With most lenders, the limit is 70% of the property value.
For commercial properties, lenders lend borrowers up to 75% of the value of the property. This is particularly applicable to non-specialized securities.
How Do Lenders Assess One’s Borrowing Capacity?
Lenders check two things for assessing borrowing capacity: income of the trust and proposed rental income
- Income of your trust – They will determine the value of your trust’s income based on its tax returns for the previous two years.
Your proposed rental income – They will then combine the proposed rental income of your property to the income of your trust. The result then gives the lender a fair estimate of your borrowing capacity.