Superannuation property purchases: all you need to know
Australia’s compulsory 12% superannuation rate can mean a hefty drop in annual salaries, but it does mean we’ll enjoy a more financially secure retirement. And, thanks to the softening of super regulations in September 2007, more investors are enjoying this security before they turn 65, instead using it to buy a property.
Importance of SMSFs
You can’t simply dip into your regular super fund when purchasing property. You’ll need a self-managed super fund (SMSF), a type of trust which, while it will mean extra fees and paperwork to set up, does gives you more control over your super investments. SMSFs also have significant tax benefits.
Investors who are reaching their borrowing capacity, outside of their super, particularly like this idea as it’s a great way to still acquire property for their portfolio.
Yet, as with any trust loan, the rules and regulations surrounding SMFS property purchases differ from those for the average loan. For a start, lender servicing is different, and will rely on an SMSF’s funds, contributions, and the future rent from the potential property purchase.
SMSF property purchases: residential and commercial investments
SMSF loans are only open to investors, not owner-occupiers, as neither you, another SMSF member, nor one of their or your relatives can live in a residential property bought in this way.
Both residential and commercial purchases must meet the sole purpose test to confirm that any benefits will be used solely for SMSF members’ retirement. For commercial properties, as with any trust loan, rules vary by property type.
Yet both residential and commercial SMSF buyers still like these loans. For example, we’re seeing a number of investors purchase high-performing residential homes because the returns exceed what they could otherwise save or contribute to their super.
Meanwhile, we’re seeing more self-employed buyers acquiring commercial properties through their superannuation fund, for both growth and income purposes.
SMSF property purchases: lender distinctions
Further helping SMSF property buyers is the growing number of lenders offering a wider range of options, making these purchases more accessible.
Both interest-only and principal-and-interest repayment options are now available to SMSF buyers. Another recent feature has been the addition of offset accounts, with these accounts allowing clients to take the interest-only option and build a cash buffer or reserve.
Unfortunately, while you can make additional repayments on your loan, you won’t be able to enjoy a redraw facility, as the 2007 changes to the Superannuation Industry (SIS) Act 1993 rule against this possibility. And, you can’t withdraw any equity growth, with the only way to realise this being to sell the property.
Additionally, you can’t borrow funds to improve the property until the SMSF loan is fully repaid, and even if you pay for the improvements in cash, there are still limitations to this plan. You also can’t utilise borrowed funds to develop the property if it has a higher and better use.
SMSF loans offer significant benefits but come with many restrictions. So, even if you already have an SMSF, or have used it to buy a property, you should speak to a mortgage broker.With the Intuitive Finance team at your side, you can take your next move in this area with confidence, knowing that we have your back when it comes to legalities, paperwork and more. Our mortgage broker specialists also have a wide range of SMSF loan connections and networks to ensure you enjoy the smoothest and easiest pathway to your new property. Just reach out to us at a complimentary strategy session.
