Key points
- Despite regulatory overhangs, the super loan market is active and good deals can still be had for SMSFs looking to borrow to buy property.
- In addition to application and monthly fees, SMSF borrowers will be up for bank legal fees, which range from $880 to $1,925, however they can go much higher.
- If you’re looking for a variable rate loan and want to borrow less than $500,000, with an LVR under 70% and don’t need access to an offset account, it is hard to go past State Custodians. But other providers have good deals too depending on your needs, such as BOQ with its fixed rate offer.
If you’re thinking about investing in property through your SMSF, and borrowing money to do so, you may want to take action quickly. Last December, David Murray’s Financial Systems Inquiry recommended that borrowing by super funds be banned. Treasurer Hockey has said that the government would respond to this and other recommendations around this time (July).
There is considerable uncertainty as to how the government will respond. While it is generally accepted that if any ban is implemented, it will be applied prospectively rather than retrospectively, outlawing limited recourse borrowing arrangements (LBRAs) isn’t as straightforward as it seems. This is because any prohibition would also affect products like instalment warrants on shares, and impact small business owners taking advantage of the exemption that allows their SMSF to own their business premises. Further, the government has pledged that within this current term of parliament, it will not make any “unexpected detrimental change to super” – some might consider this to constitute a detrimental change.
The Australian Prudential Regulatory Authority’s (APRA) pressure on the banks to reign in residential investment lending is also impacting the super loan market, with some banks cutting LVRs (loan to valuation ratios), while others, such as the NAB, withdrawing from the residential market and now only lending for the acquisition of commercial or rural property.
Despite these regulatory overhangs, the super loan market is active. Here is our review of the best loans on offer.
Super loans – features and the fine print
First, let’s start with the features and fine print, because these loans are much more complex than the standard residential or investor home loan.
- How much can I borrow? Known as the ‘LVR’ or lending valuation ratio, you can typically borrow up to 80% for residential property if your fund has a corporate trustee, and 72% if your fund has individuals as trustees.
- Eligibility – some banks require all the members to be in the accumulation phase, others look for the SMSF to have a minimum net asset position (excluding the proposed property). You should check any eligibility requirements.
- Servicing – can your SMSF service the interest on the loan? Most banks count 80% of the net rental income from the property and any concessional contributions (up to $30,000). More enlightened banks consider dividend and other investment income in the fund.
- Interest rates. Most banks use the ‘standard home loan rate’ for loans secured by residential property – some use business rates. Check carefully.
- Mortgage lenders insurance (LMI). Typically not required, although some of the non-bank lenders require LMI if the LVR is 70% or more.
- Offset account. A couple of banks offer an ‘offset account’ for residential property loans – this can be particularly cost effective for an SMSF that holds cash for liquidity or other purposes.
- Application fees. Competition is bringing these down – for residential loans, these range from $275 to $1,500.
- Loan servicing fees. Typically, around $10 per month. Some banks charge no fees, other are up to $12 per month. Offset account administration and/or split fees may also be charged.
- Bank legal fees – costs charged by the bank to review your SMSF trust deed and (potentially) your property custodian deed. These range from $880 to $1,925, however they can go much higher. Some banks provide a “panel of solicitors” and/or offer a template of the custodian deed, which tends to drive these costs down.
- Independent financial advice? Most banks (not all) require the trustees to obtain advice from a qualified financial adviser to confirm that the loan is within the fund’s objectives and that the trustees understand the risks. If you haven’t got an adviser, this means an extra upfront cost.
- Personal guarantees. Most banks will require the trustees (as individuals or company directors) to provide personal guarantees. If providing a guarantee, you may need to get independent legal advice.
The Banks
The table below show the key attributes of super loans secured by residential property from the major lenders – AMP, BOQ, CBA, State Custodians, St George and Westpac. Other lenders include Bendigo, Liberty Financial, Macquarie and Suncorp. Different conditions apply for loans for commercial property, in particular LVRs, interest rates and legal fees.
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*Legal fees quoted are for a typical loan. Additional complexity may mean higher fees.
And the winner is?
If you’re looking for a variable rate loan and want to borrow less than $500,000, with an LVR under 70% and don’t need access to an offset account, it is hard to go past State Custodians. Lowest interest rate, no monthly fee, low application (valuation) fee and legal fees.
As most super funds typically hold cash balances and receive regular income flows (rent, dividends etc.), an offset account can be a really important feature with a loan product. St George and AMP are the two banks that offer this feature on super loans – which is one of the reasons that St George is the market leader. St George has reduced its maximum LVRs back to 70%, and with AMP waiving application fees and not charging a monthly admin fee, the nod goes to AMP.
However, if you are looking at fixing your interest rate, Bank of Queensland shoots the lights out in terms of rates. BOQ is currently offering these fixed rates: 1-year 4.65%; 3-years 4.29%; and 5-years 4.59%.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.