In recent years it has become more popular amongst Australians to use their Self Managed Super Fund (SMSF) to buy investment properties.
A self managed super fund is a savings account that you manage yourself to fund your retirement, as opposed to a fund that is managed by a superannuation provider.
How does the borrowing work?
Once your SMSF is established, and your existing superannuation is transferred across, you will be able to use the existing superannuation as a deposit. If you decide to invest in property and use borrowings to achieve this end, you will be required to establish a Bare Trust which will hold the property on behalf of the SMSF.
Once your Bare Trust is established, Lenders will then advance (subject to servicing guidelines) up to 80% of the purchase price to assist with the settlement of the property. The SMSF will then need to have sufficient funds to cover the deposit and settlement costs. It’s also important that the SMSF has some surplus funds available after settlement.
The loan will be serviced from a combination of the rent received, returns from other investments, SGC payments and any Salary Sacrifice contributions.
To comply with the legislation, the borrowings will have to be Limited Recourse borrowings, meaning that the lenders only have recourse against the security property in the event of default, thus protecting your remaining Superannuation assets.
Lenders Loan to Valuation Ratio’s and servicing guidelines differ significantly, as do the costs and the interest rates charged. It is essential that you have your finance sorted before you proceed with any property purchase.
There are a number of benefits to investing in property via your superannuation fund.