The Australian Tax Office’s (ATO) draft ruling that allows SMSF trustees to make improvements to a property purchased using borrowed money will drive the rapid development of tailored lending products. In Commonwealth Bank launches Super Gear loan, I reviewed the Commonwealth Bank’s super gearing product. Another bank active in this space is St.George, which has a facility called the ‘St.George Super Fund Home Loan’.
A quick re-cap on the key rules and risks in borrowing to invest in property. Firstly, your SMSF can’t buy a property from yourself or a related party, or rent a property to yourself or a related party. It has to be a legitimate purchase of a property from an unrelated party on commercial terms – everything has to be on an ‘arms length’ basis. Secondly, you can’t use borrowed money to improve the property, however, you can use existing money in your SMSF to fund the improvements.
On the risk side, the biggest risk may be exposure to a single asset. While property might do well, other asset classes might do a lot better. Moreover, if your SMSF needs some money in a hurry to pay a liability or start paying a pension, property is not particularly liquid. You can’t sell the ‘front bedroom’ and keep the rest – so make sure the property is part of the overall asset mix. Like any geared investment, even if it is positively geared, the ultimate return will largely depend on any capital gain from selling the property – so invest carefully.
How the St.George facility stacks up
On paper, it looks pretty attractive with high lending ratios, competitive interest rates and terms, and a unique offset facility.
Loan sizes start at $100,000, and go up to a maximum of $2 million against residential property. The loan to value ratio (LVRs), which is the amount of the property’s value your fund can borrow, is favourable, and depends on the type of property and SMSF trustee structure as follows:
Apart from the LVRs, another key issue is the servicing ratio – that is, the income to support the payment of interest on the loan. St.George uses a ratio of 1.1-times for standard property, and a higher 1.25-times for serviced apartments. Commonwealth Bank on the other hand uses a standard 1.25-times.
St.George offers a little more flexibility in what it counts as ‘income’, and will include the rental income, other investment income in the fund, and concessional contributions (both the compulsory employer 9% and salary sacrifice). These amounts are then discounted by 20% – so the effective servicing ratio is 1.375-times for standard property.
On the interest rate front, St.George charges the same standard variable rate for a Super Loan as it does for a normal investment property loan. The standard variable rate is 7.30% (effective 19 December). Competitive fixed rates for two, three, or five-year terms are also available, as well as interest only rates (for terms up to 15 years).
A unique feature of this loan is the availability of an ‘offset facility’, which works like a normal online bank account. While it can’t be used to re-draw, cash deposited into the offset account will automatically reduce the principal amount that the interest is calculated on. So, it would probably make sense for an SMSF taking out a loan to move their bank account to St.George.
Another plus for the St.George product is that they are slightly more flexible around the use of personal guarantees. These will be required if you are self-employed, or if you are using income such as salary sacrifice or for that matter, the investment income of the fund to support the servicing test.
And the cost?
St.George charges a fixed establishment fee of $1,500, legal fees of $615, and a loan service fee of $12 per month. A fee of $205 per guarantee is also charged. In the first year, this will be a minimum of $2,259. You will also need to get a certificate from a qualified financial adviser stating that you know what you are doing.
Further, unlike Commonwealth Bank’s Super Gear, which packages the ‘Limited Recourse Borrowing Arrangement’, St.George customers need to find their own ‘security custodian’ to hold the legal title to the property while the loan is outstanding. St.George has a panel of solicitors that can help with the documentation – or you can talk to your solicitor or administrator. Prices for this service are coming down – if you are paying more than $2,000 for a standard arrangement, you are paying far too much.
Overall, the product stacks up pretty well. Competitive interest rates on residential property, attractive LVRs and the offset facility. It probably has been targeted at (and suits better) newer investors setting up an SMSF, rather than well-established SMSFs with a diversified portfolio of other investments. This market will get more competitive, so it will pay to shop around.
A St.George Lending Manager is the point of contact, or your mortgage broker. Victorian and South Australian funds can contact Bank of Melbourne and Bank SA respectively. And by the way, St.George will also lend against commercial and rural property, however it comes from a different part of the Bank and you will need to talk to a Business Banker!
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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