SMSF Loan Lending
Did you know that you can use your Superannuation to borrow and invest directly in property?
Using your super to invest in property can be an excellent way to increase your property portfolio. The superannuation rules changed in 2007 to allow people to borrow through their super funds for investment purposes. Lenders will allow borrowing at 70% to 80% LVR on SMSF loans with the balance of funds to come from the Super Fund.
These changes now enable many people who don’t have the cash flow outside of super to borrow and invest directly in any kind of property, including residential and commercial. This allows investors to use their property as a super wealth-building and income generating tool.
SMSF loans can be a tax effective investment choice:
- If you buy a property with your super fund and hold the property until after you retire, your super goes into the pension phase. After this, you pay no tax on either the rental income or the capital gains if you decide to sell.
- Before retirement or rather before you start to draw a pension from your super fund, any net rental income generated from the property will only be taxed at a maximum of 15% rather than at your marginal tax rate, which could be as high as 49%.
- If your super fund sells the property after holding it for 12 months, your fund will only pay capital gains tax on the sale of the property of up to 10%. By comparison, property held outside of super could be charged capital gains tax of approximately 24% if held for 12 months, even when taking into account the 50% reduction rule.
Other benefits include:
- Gearing: Using borrowed funds to make greater gains is one of the most effective long-term wealth builders available. The fact that your super fund can now borrow to buy property enables you to make use of this time-honoured strategy to increase your wealth without affecting your cash flow.
- Affordability: You may not be able to afford to buy another investment property or even your first investment property in your own name. However, given a reasonable personal super balance or a combined family member balance, you might be able to use the funds in your super to pay a deposit on a property and secure an SMSF loan to purchase investment properties within your own super fund.
- Cash flow options: When purchasing property using your super, the interest payments on the SMSF loan could be totally supported by the rental income and your normal compulsory employer contributions to the fund. This leaves no extra burden on your current household cash flow. Buying property through your fund might be a way for you to achieve your goal of owning an investment property or even owning your own business premises.
- Asset protection options: Buying property within your super fund can be an excellent way to reduce overall risk on your investment portfolio. Assets held in super funds are protected against some legal claims, depending on your personal circumstances.
- Choices for business owners: If you purchase your business premises through your super fund and then lease it to your business, the rent you pay to your super fund is tax-deductible to your business. Paying rent to your own super fund is a great way to accelerate your retirement savings without exceeding the concessional contribution limits. The fact that you can transfer commercial property that you already own into your super fund allows you to unlock cash to invest in your business or in other assets.
Some Disadvantages of SMSF Loans
- You can’t live in the property and neither can any friends or family members.
- You can’t renovate a property purchased through your super fund while it is still under a loan.
- Lenders interest rates are approximately 1% higher than normal investment property loans and establishment fees are higher too.
- Set-up costs can be quite expensive because the set-up involves trusts. Large penalties apply if your fund contravenes Superannuation Laws, which are complex.
- Buying property using your super is generally only suitable for funds with $200,000 in combined funds.
- It’s a long-term investment timeframe.
Talk to Us about SMSF Loans
The team at Multi-Choice Home Loans are your expert mortgage brokers in Brisbane for SMSF loans. Give us a call on 1300 36 36 99 to arrange an obligation-free consultation and speak to one of our expert mortgage brokers about your options. We’re happy to assist and provide any help and guidance you need to make an informed decision regarding your SMSF loans.
Please note: The information provided is of a general nature only and does not take into account your personal circumstances. Therefore, we recommend that professional advice is sought through either a financial adviser or an accountant to help you decide if buying property through your super fund is right for you.
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