3 FAQs to reveal whether an SMSF loan is right for you

26 Mar, 2018
3 FAQs to reveal whether an SMSF loan is right for you

Deciding whether a self managed super fund (SMSF) loan is the right option for you takes a bit of work. You need to seriously consider the positive and negatives of investing your hard earned retirement savings into property. But the first step is familiarising yourself with what an SMSF loan actually is.

Here are three frequently asked questions to help you determine whether an SMSF loan will be beneficial for you.

1. What is an SMSF loan?

An SMSF loan is an extension of credit for the purposes of purchasing an investment property with your superannuation funds. Instead of buying property outright with your available cash, you can instead put down an equity deposit and get a loan for the rest. Your remaining super funds and ongoing contributions will pay for the interest costs on the debt, as well as the payments that reduce the principal.

The structure of the loan and the management of the property itself is a little different from normal, however. A trustee of the fund purchases the property for the fund under an instalment arrangement. They then rent it out to an unrelated party of the fund, and the income from this automatically goes towards paying the loan. Once the loan is paid off, the legal ownership of the property is transferred to the SMSF itself.

2. What's required to get an SMSF loan?

The principal instrument you need for an SMSF loan is an SMSF. The trustee must have the power to purchase real estate, borrow money and mortgage property to secure loan repayment of said borrowing. Investing in property also needs to be consistent with the fund's investment strategy. Thankfully, SMSF loans are limited recourse, meaning if the loan is defaulted on, the creditor can only take the investment property itself, not any of the fund's other assets.

3. How much can I borrow with an SMSF loan?

Red Rock's SMSF loans allow you to borrow up to 70 per cent of the purchase price of the property. This can be a significant hurdle for many funds to reach, so an SMSF loan will definitely be more appropriate for those who have been paying into their super for a long time, given that they have to cover not only 30 per cent of the purchase price, but also have enough spare/contributing enough to service the debt.

What do you think? Is an SMSF loan something that could be a valuable tool in growing your retirement savings? If so, get in touch with the team at Red Rock Mortgages today. We can talk through the details and offer you a solution tailored to your financial needs.