SMSF financing is relatively unique. This is because your SMSF is a separate entity to you. We run through some of the features of SMSF lending below.
Borrowing power still works by income & expenses. However, the calculation of income is usually limited to:
Expenses do not include living expenses or other personal & mortgage debts. Lenders will look solely at your super expenses, which for most borrowers just SMSF mortgage debt. Lenders still apply an assessment rate of ~2% above the interest rate to determine serviceability.
Given there is no scope for equity releases, an offset is a premium loan feature for SMSF lending. If the loan is paid down, the asset will need to be sold to be re-leveraged. That is, if a $500,000 property is paid of inside super, you cannot use that asset as security to leverage further. You will need to sell that investment and turn it into cash to re-leverage. Once sold and turned into cash, the investor can use the $500,000 cash in super to leverage further investments (and potentially build $2 million in assets in super).
The above scenario is why an offset feature is particularly valuable for super accounts. It offers scope to reduce interest costs without repaying the principle of the loan. Therefore, a borrower could have an interest only arrangement with an offset feature, and maintain the principle balance of the loan for a longer time.
Not many lenders offer this and it usually comes at a higher interest rate for the privilege. Refinancing loans is also expensive, as the fees & administrative costs involved are high.
There are limited 20% deposit options available in the marketplace.
For those that allow 20% deposits, most lenders will have restrictions on the minimum fund balance allowed. This is usually set at around $150,000 – $200,000.
More commonly, a 30% deposit will be required with most lenders now. When providing a 30% deposit, investors open themselves up to a wider selection of lenders and the ability to have an offset feature with the loan.
In addition to deposit requirements, lenders will usually require the super fund to hold 10% of the value in liquid assets following the purchase. This is so that there is enough ‘buffer’ funds inside superannuation to manage repayments and costs associated with property. Contributions (‘flow of funds’) are capped inside super, therefore a ‘stock’ of funds may be required to be held back.
SMSF loans usually come with higher fees. This is usually because of the banks legal costs involved in providing documents and reviewing the trust deed that’s required to purchase the individual property. These fee’s typically range from $1,000 – $3,000.
In addition, interest rates are around 1.5 – 2% higher than standard investment loan rates.