An SMSF can borrow to invest in a variety of investments such as properties or shares. Banks and lenders have tailored lending products for SMSFs. The structure of your SMSF and the type of investment (commercial or residential properties) determines the loan to valuation ratios, typically ranging from a maximum of 65 –80%.
Differences between a home loan and an SMSF loan
There are a couple of key differences between a home loan and an SMSF loan. The first obvious difference is cost. SMSF loans are often viewed by lenders as commercial loans and therefore commercial loan costs apply.
- Interest Rate
Apart from establishment fees, the variable interest rate for an SMSF residential property loan is often about 100 basis points more than a discounted variable rate home loan. At the time of writing an SMSF property loan is approximately 5.70% whilst a home loan is 4.70%.
- Liquidity Requirement
As a general overview, most lenders require 10% of total assets or 10% of total debts to be in liquid assets post settlement. For example, Say total value of the SMSF assets is $400,000 and total loan is $200,000 (estimated post settlement) in the Fund. The liquidity requirement would be $40,000 or $20,000 depending on the lender and their liquidity requirement. This is a protection also for SMSF Trustees/Members to ensure they can comfortably meet their loan repayments and other costs post settlement.
- Redraw Facility
Another key difference is an SMSF cannot redraw against the property whereas most home loans enable you to redraw unused equity up to the loan to value caps offered by lenders. Extra repayments are generally fine on most variable rate SMSF loans. However, SMSFs can’t redraw the extra funds it has paid in generally and it can’t then use that property as security for another investment property later on.
- Not all lenders offer SMSF loans
SMSF loans are a lending niche and not all lenders offer these solutions. Further, some lenders have more appetite (and expertise) for certain deals than others. Certain Banks and Lenders might impose a requirement for Trustees to seek financial advice regarding borrowing in the SMSF.
Some lenders who offer SMSF loans lack processing capability to ensure the deal runs in a timely manner which can result in additional fees and penalties. We work with Sleep Tight Financial Solutions who is specialised in SMSF lending. For more information on loans in super, please visit our SMSF loans page here.