The property market is showing signs of life. Auction clearance rates are up – with Australian Property Monitors reporting clearance rates of 76.3% and 71.6% for Sydney and Melbourne respectively this weekend despite a surge in listings. Sydney’s rate was the highest recorded for some years.
Rising confidence from the sharemarket rally, interest rates with a big figure of five in front of them, the prospect of further out of cycle rate decreases and the natural evening out of excess supply seem to be sparking renewed investor enthusiasm for residential property.
Investing through their super fund is one option on the table for many investors, with an obvious attraction being that if the property is held through to the ‘pension phase’, it will effectively become free of capital gains tax. Most of the banks now offer “super loans” (or ‘Limited Recourse Borrowing Arrangements’ as they are technically referred to under the SIS Act), and as the loan features and costs can be quite different, we thought it was time to review the products available.
Questions to ask
- How much can I borrow? Known as the ‘LVR’ or lending valuation ratio, for residential property you can typically borrow up to 80% of the property’s valuation if your fund has a corporate trustee, and 70% to 72% if your fund has individuals as trustees. Commercial property LVRs are typically around 65% – some banks will only lend if the SMSF trustee is a company.
- Who is eligible? 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 – what is counted by the bank to determine whether your fund can pay the interest? Most banks take 80% of the net rental income from the property, and concessional contributions (up to $25,000). More enlightened banks consider dividend and other investment income in the fund.
- What interest rates are used? Most banks use the ‘standard home loan rate’ for loans secured by residential property – some use higher or even business lending rates. Check carefully. For loans secured by commercial or rural property, the rates are often based off a business line of credit.
- What about mortgage insurance? 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.
- What are the application fees? Competition is bringing these down – for residential loans, fees range from $1,500 to $350. On the commercial side, the application fee is typically 0.5% to 0.8% of the loan amount.
- What are loan servicing fees? Typically, around $10 per month for property secured by residential property.
- What are the bank’s legal fees? These are costs charged by the bank to review your SMSF trust deed and (potentially) your property custodian deed. These range from $1,500 to $2,150, however 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 that the loan is in keeping with 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) to provide personal guarantees. If providing a guarantee, you may need to get independent legal advice.
How the banks stack up
The table below shows the key attributes of the super loans from the major lenders – AMP, Bank of Queensland, Commonwealth Bank, NAB, St George and Westpac. Other lenders include Bendigo, Liberty Financial, Macquarie, State Custodians and Suncorp.
As competition is increasing in this market, the banks are no doubt negotiable on some of the loan pricing aspects. And, because of the complexity of the loans (in particular the upfront documentation requirements), it really will pay to find someone in a bank (or a mortgage broker) who knows what they are talking about.
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.
Also in the Switzer Super Report
- Peter Switzer: A bout of indigestion [1]
- Lance Lai: The S&P/ASX 200 – how long will the bull play out? [2]
- Penny Pryor: Woodside, Coca-Cola, BlueScope end week up on results [3]
- Rudi Filapek-Vandyck: Weekly broker wrap – Coca Cola, Drillsearch and Echo Entertainment upgraded to buy [4]
- Tony Negline: Why you should consider a corporate trustee [5]