This article first appeared in the Coffs Coast Advocate.
Getting a loan inside your self-managed superannuation fund is not the same as getting a mortgage on your home. The rules are different and the banks have different expectations. I talked to Rod Cross, Lending Manager at Regional Finance Solutions about what to expect.
How does a loan inside super differ from a mortgage?
The big difference is that you must use a Limited Recourse Borrowing Arrangement (LRBA) to borrow inside super. The LRBA guidelines are designed to protect your super fund, which is a good thing. But they do make borrowing inside super more complicated than getting a mortgage.
How does the LRBA protect your super fund?
Your fund is required to keep the mortgaged property in a holding trust, separate to the other assets in your SMSF. That means the bank cannot come after these assets in the event of a default.
Does an LRBA limit what you can do with the property?
Yes. First of all because the asset is held in a holding trust, you won’t be able to leverage the equity to secure a loan for another investment. Plus the guidelines prevent you for using borrowed funds to improve the property, which means you can’t use the loan to renovate or build on empty land.
What sort of deposit will banks expect under an LRBA?
The LRBA is structured to protect your super fund. So the banks only recourse is against the mortgaged property, meaning the loan is more risky for the bank. So naturally they set higher hurdles to protect themselves.
Most lenders will require a deposit of 20% on residential property and 25-35% on commercial property. Sometimes they will also ask for a liquidity premium, requiring that as much as 10% of the property value is held in cash in the fund.
Which banks are the best to deal with for LRBA?
Lenders vary widely when it comes to superannuation loans, so it really pays to shop around. Some banks don’t offer LRBAs at all; so don’t be discouraged if your personal bank won’t come to the party. This is one type of loan where it really pays to use a mortgage broker.
We have teamed up with the experts at Regional Finance Solutions and Your Commercial Property Specialist to develop a comprehensive eBook to help guide you through the risks, rules and regulations. We recommend you download this eBook and surround yourself with a team of professionals before embarking on this investment strategy.