A Self Managed Super Fund (SMSF) borrowing is used to describe when a superannuation fund borrows money to purchase an investment asset.
Many investors borrow money in their personal name or via a company or trust structure to purchase property, stocks or other investment assets.
Borrowing to invest in super is new. Until recently, this type of investment strategy was not available because the superannuation laws prohibited borrowing except in limited circumstances. The law was amended from September 2007 to allow super funds to borrow more broadly. ad subsequent amendments in 2010 have further clarified the capacity of super funds to borrow to invest.
When a lender assesses the borrowing capacity they will look at the Loan Valuation Ratio (LVR) and the servicing of the debt. Not every lender does SMSF borrowing’s however for those that do commercial investment property loans they will generally lend up between 65% – 70% of the property value.
Servicing of the debt come from 2 main area’s – your superannuation contributions and the rental income from the property. If there is a shortfall between the Principal and Interest Repayments and the combined super contributions and rental income, the difference is made through increased super contributions.
Before making a decision to go ahead with a SMFS borrowing
If you are thinking about deciding to take this approach you firstly need to obtain your own legal, tax and financial advice. By gaining advice you will then understand whether your SMSF has the appropriate powers to borrow and invest in property, and that your SMSF structure is supported by appropriate legal and financial documents.
As this is a relatively new borrowing strategy, it is also can attract additional legal and accounting fees, such as annual audit fees, that are not common to purchasing a personal home or investment property. Again we ask that you consult your legal and financial advisors on the costs, and then come and talk to us in respect to each lenders borrowing costs.