Borrowing Through Your SMSF
Self managed super funds can give Australians more control over their retirement savings, and one of the unique benefits of an SMSF is the ability for the fund to borrow money.
Some people may question why a superannuation fund would have to borrow money. The answer to this comes down to leverage.
With the average super fund balance being around $50,000 for young Australians, many do not have the opportunity to invest in large assets such as property. But by taking out a mortgage through an SMSF, many more Australians can invest in these larger assets.
There are some special rules in place when it comes to the types of assets which an SMSF can purchase and how they can borrow the money, so it is important to seek professional advice before making any investment decisions.
Borrowing for Residential Property
Australians love investing in residential property, but with the high costs involved in property investment it has become a lot more difficult for many younger Australians.
By utilising a portion of their super balance as the deposit, an SMSF member can purchase an investment property by taking out a loan through their SMSF to cover the costs.
A larger deposit will be required when borrowing through your SMSF, and generally this is around 30 to 40 per cent.
It is important to remember that you cannot live in any property owned by your own SMSF, and you cannot rent it out to friends or family for cheap. The property must be rented out at its full market value.
Borrowing for Commercial Property
For SMSF members looking to borrow money to invest in commercial property, the rules are very similar to those for residential property investment.
There is one major different however, and that is the ability for a business owner to use their SMSF to borrow money to purchase their own business premises.
Regardless of whether the property is to be rented to your own business or to an unrelated business, your SMSF must still charge full market rental rates for the property.
Borrowing for Renovations
Recent changes to the regulations governing the SMSF sector have made it possible for an SMSF to borrow money in order to perform renovations.
The property to be renovated must be an investment property owned by the same SMSF. The renovations can be made to either a residential property or a commercial property.
Another way in which an SMSF can borrow money is via a margin loan. This type of lending is treated differently to loans for property purchases, however it is another way to leverage your super balance in order to seek higher gains.
Margin loans can generally only be secured against Australian shares and managed funds, and the assets must be owned by the SMSF.
Taking the Next Step
There are a number of different professionals who can help you to take the next step towards borrowing money within your SMSF.
Typically mortgage brokers with their lending experience are best placed to assist, but it is important for find a broker who has experience with SMSF lending.
If you do not have a mortgage broker then the best place to start will be your financial adviser or accountant who will be able to guide you in the right direction.