An SMSF Bank Loan also know as a Limited Recourse SMSF Borrowing Arrangement is a type of facility used by an SMSF to borrow money. This type of arrangement is an exception to the prohibition on SMSF borrowings.
At Superannuation Warehouse we can assist with executing a Limited Recourse SMSF Borrowing Arrangement in order to keep your Fund compliant. Please ensure that your Trust Deed and Investment Strategy allow for the investments that will be purchased through the borrowing.
If the SMSF has sufficient funds to put down a deposit, the remainder of the purchase price can be borrowed. The SMSF can borrow either from a financial institution (a bank or a credit union for example), or from the Fund’s Members.
Loans are set up with non-recourse borrowing arrangements. This means the lender has no right of recourse on any other assets in the SMSF. For this reason, the lender (the bank) will ask the Members for a guarantee. This arrangement is generally referred to as a limited recourse borrowing arrangement.
The SMSF provides the funds for a partial payment on the property and pays all the relevant fees. The SMSF will borrow to settle the balance.
If the SMSF pays a larger deposit on the investment property, the bank may waive its requirement for security from the Trustees. The property will be the sole security for the loan under this limited recourse loan agreement. In the event of default, the lender only has the right of recourse on the property; there is no right of recourse on other assets held in the SMSF.
As a general rule-of-thumb, if the bank is lending 80% of a residential property’s value, it will ask the trustees for a guarantee. The bank will not normally ask for a guarantee when the loan-to-value rate is 60%. For commercial property, these percentages are 70% and 50% respectively. In assessing the need for a guarantee, the bank will take into account the condition of the property, the credit history of the borrower, and the expected income from rental.
When an investment property is owned by a Bare Trust, the SMSF will be the ultimate owner. The Bare Trust is merely the title holder until the loan is paid off. The SMSF will receive lease payments from the lessee. Interest paid by the SMSF will be accounted for as an expense for the SMSF.
After the loan is repaid, the SMSF has the right, but not the obligation to acquire the legal ownership of the investment property.
Once the loan under a Limited Recourse Borrowing Arrangement (LRBA) is repaid, the SMSF Trustee has two options:
The Trustees should be mindful of certain restrictions if the property remains under the Bare Trust arrangement. No fundamental changes to the character of the property is allowed as long as the property is under the Bare Trust.
There has been recent guidance from regulators regarding what happens to property ownership when the loan is paid off. To view this legislation, click here.
When purchasing a residential property, the SMSF is forbidden from having any dealings with a related party. This means that members of the Fund cannot sell their own houses to the SMSF. The Fund is also forbidden from renting the property to a Trustee, a family member, or a parent-in-law. Trustees can, however, purchase the property from the SMSF when entering the pension phase.
All investment purchases should pass the sole purpose test.
You are free to use any bank or lender when arranging finance for your SMSF property purchase. To get the best deal possible, you’d be well advised to use a mortgage broker. You can use a big bank or one of the niche players like Macquarie who, by the way, have a very informative free brochure with some great examples. You can also download a cash flow analysis brochure here which gives examples on the cash flow details of an property with a limited recourse borrowing arrangement in place.
Trustees can contact Steve Gilbert from Tradies Finance or Robert Sestan from Park Road Finance for more information. Their contact details are noted below:
We as Mortgage Managers take a more hands on approach by crafting solutions tailored to individuals needs rather than simply selecting pre packaged options as brokers do. We specialise in SMSF and NDIS. We as Mortgage Managers find funds to back our own products that can produce a fit and solution that is specific for you and your goals.
This personalised approach allows for greater flexibility and the potential for more favourable outcomes, such as quicker loan repayment and an expedited path to retirement. By aligning the loan structure with specific goals and strategies, you’re aiming to not only facilitate a smoother lending experience but also to optimize financial outcomes for our clients.
*All calculations are based on individual circumstances – your returns may vary. Consult with Steve to get and accurate calculation on returns.
Inquiries to Steve Gilbert on 0412 209595 for a no obligation and no fee initial review, so we can place you with a specialist that suits your needs.
Thankyou for your interest in seeking finance to purchase or refinance, residential or commercial property, for your SMSF. Why SMSF Lending with Park Road Finance:
Inquiries to Robert Sestan on 0410514887 for a no obligation, so we can place you with a specialist that suits your needs.
The ATO’s ruling on borrowing can be viewed by clicking the link below.
The property details and other information we need from you before we can start setting up your Bare Trust can be found by clicking here.
A: An SMSF cannot borrow to build a house on a vacant land owned by the SMSF because a Bare Trust can only hold a single acquirable asset. Building on a vacant land will result in multiple titles. Additionally, it would also give a charge over an existing asset which is the vacant land. This is a breach of the LRBA clause and will result in a contravention. See here for ATO guidance.
We are Melbourne based with clients throughout Australia. Our SMSF administration service is mostly paperless. This enable us to charge a fair fee, resulting in a good value-proposition for you.
Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.
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