SMSF Borrowing

The very first step if you’re keen to look at borrowing to purchase property in your SMSF is a good long conversation with your accountant and or financial planner. It’s not something that’s for everyone and here’s a quick checklist to see if it might be right for you:

  1. Do you have at least $200,000 in super to establish an SMSF (ASIC recommends that no less than that should be recommended if you want to look at borrowing to purchase a property).
  2. We recommend even a little higher (say $250,000 +) as many lenders will also want to see “liquidity” – ie. a buffer of funds in cash or shares outside the value of the property. That also makes sense in terms of preparing yourself in case one (or the sole) contributor to the SMSF loses their job or if your property is without a tenant for an elongated period of time.
  3. It’s good if you have a decent amount of working life left – some recommend at least 10 years to give you time to see a full property cycle which allows the property to grow in value but also to give you time to pay down the debt so that it can provide you with an income in retirement.
  4. Speaking of paying off the loan, what is your plan to pay off the loan? Here’s where some really strong conversations with your accountant and or planner will be really helpful. It’s important that you go into any debt knowing how you’ll pay it off, but especially something which is there to protect and look after you in retirement.

Did you knows…

  1. Did you know that in SMSF you can’t use equity from one property to allow you to purchase another property. Each property is it’s own entity and can’t be used to secure another.
  2. There are certain structures you need to have such as a bare trust to do an LRBA  (Limited Resource Borrowing Arrangement) – your accountant can help you set these up, however it’s sometimes important to wait and see both if you can borrow (because they’re expensive to set up if not required) and also if the lender offers a cheaper way to set up that will be exactly in line with requirements (sometimes the lender can set up on your behalf with your accountant’s go ahead and it can often expedite the process).
  3. You can use borrowed funds for maintenance and repairs, but not for improvements or constructions (you can do this however with other cash within your SMSF).
  4. There are a lot of extra costs involved when setting up and borrowing in your SMSF that you need to be prepared for along with annual audit costs going forward.

If in doubt, start with your accountant and work from there.

Another good reference to read: