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Unboxing SMSF lending
How it works is an SMSF borrows money to invest in property or other assets. This type of lending allows SMSF trustees to leverage their superannuation savings to purchase assets.
According to Eva Loisance, head of broker at Finni, SMSF lending is an affordable way for borrowers to enter the property market.
“Everybody would have retail or industry superfund where your employer puts 11.5 per cent of your income every year and then you get that when you retire, it’s your retirement money. So, you don’t have any power on top of that. But if you do create a self-managed superfund, it’s basically you taking over what the retail or industry superfund is doing and managing your own money for your retirement,” said Loisance.
“That allows you to buy property and often you need a loan to buy that property. That’s where SMSF lending comes in play and it’s becoming extremely popular. So, it’s a way of investing and using that as your retirement fund rather than the superfund.”
People seem to be catching on, as according to Mortgage Business sister brand The Adviser, “the yearly establishment of new SMSFs has significantly increased, reaching 24,591 in the financial year 2023, compared to 13,473 the previous year and 8,490 two years prior. In fact, 7,836 SMSFs were established in the September 2023 quarter – the highest number ever recorded.”
“When you get the virus of investing, people really get addicted to it and they’re like, I can’t invest anymore. They’re trying every avenue to invest. So, they’re looking at super. And the other thing is regardless of how people are keen to invest is the leverage you can get buying a property,” said Loisance.
“Let’s say you’ve got $150K in your super, your average return on shares is 8 per cent of 150. But if you buy an investment property and then your property is worth now $600K, even if the returns are lower, let’s say 5 per cent, it’s 5 per cent on 600. That’s better than 8 per cent on 150. So, the leverage in there and then the benefits if you sell it in retirement, there’s heaps.”
How to get the loan
Loisance said that the process of obtaining an SMSF loan can be more difficult than a traditional loan as there are more steps and costs involved and the bank sees it as a riskier venture, putting the interest rates higher than normal.
“You need to get an accountant or a financial planner involved. You need to create a SMSF, you need to create the trust once you get the property, and you need your SMSF trustee. There’s a bit of paperwork involved. It’s costly. So, someone that starts will probably spend $5,000 plus an extra $2,000 or $3,000 every year to maintain that. So, there’s a cost to it. But again, the leverage that people are starting to see, it’s worth it,” she said.
The bank justifies that it’s more expensive because it’s riskier, which it really isn’t. But people don’t really care about the rates because it’s not their money paying for it, in some ways. It’s paid within the super. And you can’t mix the two. You can’t put personal funds there and take money out of the super.”
Brokers should be aware
This route of investment can be perfect for those without the money to make an initial deposit. While Loisance believes SMSF loans were once purely for the self-employed, now everyone is taking advantage of the benefits.
“A lot of accountants and financial planners are stuck on the old ways, where it was, you need 200K in your super. You need to be self-employed and buy the actual commercial property where your business is operating. That was the great tax saving thing to do at the time. But now it’s for everybody,” said Loisance.
“But the issue is sometimes we see that there is a disconnect between what’s possible and what the accountant is telling the client. So, clients come to us and say, I’m not ready yet. I’m like, actually, you’re more than ready. You were ready two years ago.
“The other big thing with self-employed is, as an employee, you get your 11.5 per cent super. You don’t have to think about it. When you’re self-employed, you don’t have to pay yourself super. So, a lot of self-employed haven’t been paying themselves super. And at 50 there’s like $20K in there, and they would struggle through retirement. But again, historically, when you went to get a loan, the bank would say, what happened in the last two years? Did you pay yourself super? If you didn’t, well, sorry, come back in two years. Now the bank [is] saying, well, if you commit to contribute to your super, and you’ve got the financial means to do so, we’ll take that on board, and then we’ll lend you money.”
Whether for commercial or residential property, an SMSF loan can be a great way to break into the property market without the significant initial investment. While you may need to jump through more hoops to get there, an SMSF loan can be a lucrative opportunity.
Loisance said: “It’s less expensive. The biggest barrier was you need $200K, which takes time to get there. But now, if I earn good money, the way to pay less tax is to make contribution to my super, so their super goes up quicker. They get to $150K, that’s enough to buy a $450K property. For most people, that would work.”
[Related: Pepper Money launches SMSF lending]
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