Can You Lend Money To Your Self Managed Super Fund To Purchase Property?
If you’re looking to maximise the potential of your Self Managed Super Fund, you might be wondering whether you can lend money to your SMSF in order to purchase a property. The short answer is, yes you can!
You can also lend to your SMSF to buy other assets and listed shares, but we can talk about that later.
In this article, we’ll explore the ins and outs of lending money to your SMSF in order to purchase a property, what you need to consider and how it can be a strategic financial move.
The way to do this is through a Limited Recourse Borrowing Arrangement (LRBAs), a financial agreement that allows individuals to use borrowed funds to invest in assets, in this case, property!
This is a fantastic strategy if you are looking to increase your exposure to property investment. But first, there are some important factors you’ll need to consider…
You’ll need to have everything in place in the same way a bank would:
Lending Agreement: A formal lending agreement between you and your SMSF is essential.
Mortgage over the Property: Just like a conventional lender, you’ll still need a mortgage registered over the property.
Luckily, here at SMSF Wizard, we take care of these agreements for you!
Key Considerations
Anti-Avoidance Rules: The ATO has implemented anti-avoidance rules to prevent unfair accumulation of superannuation assets. At SMSF Wizard, we will make sure to keep you compliant so you won’t have to stress.
Minimum Interest Rates: Interest rates for loans within an SMSF must align with the guidelines in Practical Compliance Guidelines (PCG) 2016/5.
Loan to Value Ratio (LVR): There is a cap on the LVR. For property, it’s 70%, (e.g. You want to invest in a $1,000,000 property (residential and commercial) you can have a maximum of $700,00 lent across).
Interest Rate Options: You can choose between fixed and variable interest rates, but fixed rates can only extend for up to 5 years before converting to a variable rate.
Loan Term: The maximum loan term for residential and commercial property is 15 years.
Repayment Structure: Repayments must be made monthly and include both principal and interest.
Motivators To Utilise This Strategy
Increased Exposure to Property Investment: Use your superannuation as a deposit to increase your exposure to property investments and maximise your returns.
Concessionally Taxed Earnings: Any earnings on your lent money are taxed at a concessional rate of 15% or even 0% if the asset is held long-term within your SMSF.
Leverage Outside Equity: You can borrow against a property outside of your SMSF and lend this capital to your SMSF to purchase assets. This allows you to utilise your equity effectively.
No Impact on Contribution Caps: LRBAs enable you to inject funds into your SMSF without affecting your contribution caps.
Flexibility: You can refinance your lending or even transfer it to a bank if the need arises. You can also pay it back the loan faster and set a higher interest rate.
SMSF Profits: Your SMSF retains all profits generated from capital gains or income generated by the asset.
Potential Drawbacks To This Strategy
Income Tax on Interest Earned: You’ll pay income tax on the interest earned
Potentially Higher Interest Rates: LRBAs may have higher interest rates compared to traditional bank loans.
Documentation and Mortgage: Completing the necessary documentation and registering the mortgage can be time-consuming, but you won’t have to worry about this because we will do this for you.
Repayment Requirement: If you want the cash back, you will need to use funds from your SMSF to repay yourself.
Limitations on Asset Use: You cannot use LRBAs to purchase land and build a property, nor can you personally use the acquired assets.
In conclusion, lending money to your self managed super (LRBA) can be a powerful financial strategy in order to invest in property. With SMSF Wizard’s guidance and support, you can make informed decisions to supercharge your retirement savings.
Give us a call and we can have a chat!