Borrowing Using Super Fund

However, the products that have subsequently been released by the major banks in Australia that comply with the legislation may have loan to value ratios or other necessary conditions that make the purchase difficult if not impossible
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Not having looked into instalment warrants within a SMSF, what LVR do these banks require before they'll look at this type of loan? What might be the 'other necessary conditions that make the purchase difficult if not impossible'

Nicely done on the paper btw, very easy to understand.
 
shady said:
Not having looked into instalment warrants within a SMSF, what LVR do these banks require before they'll look at this type of loan? What might be the 'other necessary conditions that make the purchase difficult if not impossible'

Nicely done on the paper btw, very easy to understand.
Click to expand...

With the nab its around 65% but they insist on personal guarantees. That is in breech of the SIS regulations if you are a beneficiary of the fund and or a trustee.

I had a long discussion with my nab banker who then got in touch with head office when I pressed about at what LVR would they accept without a personal guarantee. It ranged from 40% to 55% depending on your profile and the quality of the asset and tenants.

Regards NR
 
MattR said:
Last I looked around 70%
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NAB's is 65% they have the best interest rate, they wont discount the SVR but they will give the the fixed rates as published. I currently have mine fixed for 1 year only at 5.49% I will then lock in for 5.

Spud
 
Personal guarantees are one of the things that "make it difficult". We don't believe that providing personal guarantees are a breach of the SIS Act but we believe they breach the non arms length provisions within the Tax Act. That is why we don't recommend personal guarantees.

The difficulty is that a lot of the lenders then either substantially reduce the LVR (down to about 55-60%) or significantly increase the interest rate (up to 11%). So it can make the costs prohibitive.

That is why some people are looking or should I say re-looking at the related unit trust strategy.
 
373au said:
NAB's is 65% they have the best interest rate, they wont discount the SVR but they will give the the fixed rates as published. I currently have mine fixed for 1 year only at 5.49% I will then lock in for 5.

Spud
Click to expand...

Spud

I am also interested in a NAB loan but don't want to go under 70% LVR if I can avoid it. Is NAB 65 or 70%? and did you have to sign a personal guarantee?

Cheers
 
Hi there,

Thanks for the article coastymike, it was very helpful.

The scenario of "Mario and Nicole" is interesting...

They can use 250k of PPOR equity with their 100k cash to buy a 350k res IP in a SMSF/related unit trust arrangement.

Or, they can use a property warrant in their SMSF with their 100k cash at say 50% LVR to buy a 200k res IP.

Or, they can use a property warrant in their SMSF with their 100k cash + 250k of PPOR equity at say 50% LVR to buy a 700k res IP (but I'm not really sure if this scenario is possible??).

Or, they can use 250k of PPOR equity outside of their SMSF at say 90% LVR to buy potentially up to $2.5MM of res IP (serviceability factors aside), that could be further leveraged as property values increased in the future.

I would personally probably choose the last option (but appreciate that there are a lot other variables here that could influence someone's choice eg. their age, investment objectives, risk profile, asset protection, tax position etc...)...unless...the property warrants offered by the banks (without personal guarantees) became much, much more competitive with respect to LVR's and interest rates.

I generally think that these SMSF gearing strategies are better suited to business premises owners like "Peter and Jenny" (in coastymike's article) or owners of other comm IP.

I also think that when assessing the whole viability of these strategies you should be more conservative and ignore employer super contributions (as if you don't have a job you can't rely on this income, or if you have to work part-time it will be less).

And the deal really should also be positively geared/self-sustaining in it's own right, without you having to kick in money to prop it up, eg. with large voluntary contributions (particularly if you are younger in age).

Further, the salary sacrificing eg. of 50k pa tax-deductible per person (for self-employed I think??), can be done regardless of whether you are geared in a SMSF or not, so shouldn't be the deal clincher on this either.

And of course we shouldn't forget all the bank fees, accounting fees and legal fees etc. that will be generated from this strategy/structure either!

Just my thoughts...

What do other think?

Is anyone here actually seriously considering doing this (either the SMSF/related unit trust arrangement or using property warrants) or already done it?

My concern with the property warrant strategy is that it seems like it's presently being promoted/marketed to "mum and dad investors" and appealing to their desire for "control" and "love affair" with res IP...when in fact, this may really not be the best/most appropriate use of this particular product.

For me, ultimately an SMSF is aimed at being a structure generating a high passive retirement income stream, and as we all know, for the most part, res IP is a relatively low-yielding/high on-going expense type of asset...

So shares...even sharemarket installment warrants if you must...or business/commercial property (geared or not) are far better alternatives in this structure I believe...
 
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I have been researching this area heavily in the past few weeks, and have decided not to go ahead with SMSF borrowing at this stage.

I really like the idea of buying within an SMSF, because the tax breaks after retirement are excellent. At retirement, you pay NO income tax on profit from investments held by the Fund.

The thing that has given us cold feet is the borrowing side of it, specifically:

  • So far, only a small number of lenders are doing this
  • The interest rate will likely be higher than the standard variable
  • There will likely be additional ongoing fees for these kinds of loans
  • We would need a new Bare Trust for each new property (our accountant charges $1500 plus GST for each one)
  • The debate over personal guarantees
  • Some general confusion over what should be the basics of this process (eg last week, two accountants and two mortgage brokers gave us four different answers to one question about Bare Trusts)

For the moment, we feel a bit safer taking a "wait and see" approach on SMSF borrowing. I hope my super eventually bounces back to a point where one day I can buy two or three properties outright - and get the tax benefits without the finance headaches. (Don't wake me up, please. I'm having a ncie dream.)

My humble opinion, for what it's worth.

Harriet
 
$1500 & gst sounds very expensive. My last trust set up was a discretionary trust, the fee was $800 & gst and that included the $200 stamping fee. Also, that was through a mid-size law firm and the trust wasn't completely straightforward, as it referred to certain ASIC rules the trust has to comply with. (although I'm sure it was essentially a copy and paste form the previous one he did)

I haven't set up a bare trust before, but I can't imagine there's any complexity to it?

Cheers
Jonathon
 
Jonathan

On the contrary. The trusts established to allow super fund to "borrow" are quite complex and involve interaction between the SIS Act and the Tax Act. $1,500 is a fair fee. I am aware of many mid tier law firms charging between $2,000 to $3,000 for each additional trust so the fee Harriet has been quoted is very fair.
 
I couldnt agree more with Mike.

$1500 is a steal and if after you double check with him that that is correct post his details here for all to see.

Some of the big city firms charge between $6000 - $16,000 for the mountain of paperwork that is involved.
 
coastymike said:
Jonathan

On the contrary. The trusts established to allow super fund to "borrow" are quite complex and involve interaction between the SIS Act and the Tax Act. $1,500 is a fair fee. I am aware of many mid tier law firms charging between $2,000 to $3,000 for each additional trust so the fee Harriet has been quoted is very fair.
Click to expand...

Mike

I'm happy to be proved wrong. As I said, I haven't set up such a trust yet myself so I'm not aware of the complexity involved. However, I think my initial thought on the price (and I didn't articulate this) was that $1,500 was a lot for a regurgitated trust, in the case of multiple purchases. Naturally there'd be significant start up costs for holding property in a SMSF, but shouldn't it be a lot cheaper for each subsequent property?
 
Jonathan

We then get into the interesting debate as to what intellectual property is really worth. That is effectively what you are paying for with a trust deed. It is a bunch of words in its basic form. But a bunch of words designed to comply with legislation. This has taken the respective lawyers hours of time and effort and that is what is reflected in the price. A bit like a recording artist. You could argue each CD should sell for $2 as the cost of distribution and recording have already been accounted for in the original CD. However we know things don't work like that. If they did we would have very few recordings as noone would earn enough to make a living. Fair enough some make great livings but that is the wonders of capitalism. As more and more people enter into borrowings with SMSF I think the prices will come down. A bit like Plasma screen TV's. The more demand increases and the cheaper the costs of production (very easy to decrease cost of production when it is intellectual proeprty) then the lower the price.

Arguing that each deed should cost less is a bit like arguing that each time someone does a job they have done before their salary should decrease as they should become more productive and therefore the time taken is less and they should be paid less. It's an interesting discussion about intellectual property and one that most people think is worthless. Pirated versions of deeds, CD's and a whole host of IP abounds. I don't agree with it but many do.
 
Coasty

Thanks for sharing and nice job.

How exactly would the trust be set-up in order not to be considered a related party to the fund?

Ben
 
In my opinion St George have the best SMSF loans now and they don't require personal guarantees.

I think the NTAA bare trust deed only costs $995 complex issues or not it is still just pushing a button to print the same deed over and over again with a change of names
 
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