SMSF loans

[Rolf Latham]

Aaron, I realise this approach has to be financially viable and in my case I believe it is. With $60K I wouldn't even venture there, IMHO my strategy would be to build it up first....
I have been told about $5K-$8K to put the total structure in place. As I said I have the bare structure in place so now it's up to finding the IP and the warrants to be set up.
My question is, is it the same cost per each property you would buy? Basically, is one bare trust enough and then have 4 IPs (4 warrants with loans?), or would you need a bare trust for each?
I wonder who could provide best structure advise, somehow I am leaning towards the lawyer I used. My accountant, does not want to do it (I know he has no experience there)....

one bare trust for each property.

One loan for each property, unless you are buying a block of units or the like

A bare trust shouldn't cost you a whole lot of money, in fact some lenders will give you the pro forma, or or give you a full bare trust.

Some would argue it's probably not wise to let your lender do legal documents of this type, but it certainly can save costs in this way is that your core focus

Thanks

Rolf

 

[Peter_Tersteeg]

Interesting point, my accountant said something along similar lines, basically that they may even abolish borrowing this way, is it true?

Borrowing through a SMSF requires a combination of financial advice and credit advice. This in turn requires an AFSL and an ACL.

 

[Rolf Latham]

You also want to consider that the risk for the lender in a SMSF loan significnatly higher than a normal residential loan. There is a higher risk of default, getting money into the SMSF for things like repairs is tricky (again due to the complexity of superannuation compliance). To top it all off, the loans must be non-recourse so the lender has no one to go after except the property if the loan goes into default..

I beg to differ on this one, we don't do a lot of SMSF, but enough across a range of lenders, to see that these things are generally pretty low-risk number of reasons.

While they are limited recourse, most lenders still force a personal guarantee..............

Mainstreams for us in this game are St George and ING.

Neither of these will approve a loan without a significant buffer sitting in the SMSF.

where this may all come unstuck, is where we start getting large levels of unemployment............. we may end up with a double situation of reduced rent, and reduced contribution, either from total lack of work of one partner in a family, or reduced contribution from combined lower income.

I haven't seen any arrears or delinquency statistics on SMSF, so I am off to do some research

Thanks

Rolf

 

[Peter_Tersteeg]

I'm actually inclined to agree Rolf. Prices would have to drop significantly to put these loans into a negative equity situation, but moving cash thorugh a super fund can be tricky.

The lenders requirements at the moment doesn't give the banks much of a downside, but I also don't think we're going to see 80% or higher lending in this space any time soon.

 

[MIW]

While they are limited recourse, most lenders still force a personal guarantee..............

Exactly, 2 years ago they wanted this from us:
2% higher mortgage and extra guarantee.....a bit greedy approach don't you think? Wouldn't one option be enough?

where this may all come unstuck, is where we start getting large levels of unemployment............. we may end up with a double situation of reduced rent, and reduced contribution, either from total lack of work of one partner in a family, or reduced contribution from combined lower income.

And you forget 'reduced contribution' enforced by government changes too, which has lately happened and MAY continue to happen....

I haven't seen any arrears or delinquency statistics on SMSF, so I am off to do some research

That would be so great! Thank you for that.....

 

[Terryw]

I think someone above mentioned something about the rules changing.

There are new proposed amendments to the Corporations Act which will define SMSF loans or limited recourse borrowing as being a 'financial product'. This will probably mean brokers will need to have an AFS or be an authorised rep of an AFS.

http://www.treasury.gov.au/documents/2293/PDF/exposure_draft.pdf

 

[Rolf Latham]

I think someone above mentioned something about the rules changing.

There are new proposed amendments to the Corporations Act which will define SMSF loans or limited recourse borrowing as being a 'financial product'. This will probably mean brokers will need to have an AFS or be an authorised rep of an AFS.

http://www.treasury.gov.au/documents/2293/PDF/exposure_draft.pdf

meh..............

so much focus on paper, legislation, RTO providers, PS146, RG146, in the end , the client is going to get so done over by triple PHD qualified scholars that drive cabs for a living

ta

rolf

 

[MIW]

meh..............

so much focus on paper, legislation, RTO providers, PS146, RG146, in the end , the client is going to get so done over by triple PHD qualified scholars that drive cabs for a living

ta

rolf

Exactly, wasn't it Warren Buffett that said something along these lines....
Isn't it amazing that a chauffered client is driven to the city only to be given advice on how to invest his/her money by a qualified scholar who perhaps catches a train to work.... (he makes an interesting point, don't you think?)

 

[Aaron_C]

Exactly, wasn't it Warren Buffett that said something along these lines....
Isn't it amazing that a chauffered client is driven to the city only to be given advice on how to invest his/her money by a qualified scholar who perhaps catches a train to work.... (he makes an interesting point, don't you think?)

That's because the qualified scholar is hoping to get on the gravy train with the chauffeured client and get a slice of the action - well, as much as someone on a wage can...plenty of people have started as ****-kickers for a rich man only to eventually take over the company and push out the original family/founders/descendants.

 

[MIW]

That's because the qualified scholar is hoping to get on the gravy train with the chauffeured client and get a slice of the action - well, as much as someone on a wage can...plenty of people have started as ****-kickers for a rich man only to eventually take over the company and push out the original family/founders/descendants.

Oh Gosh, I hope that doesn't happen too often. I still have faith in people.

 

[Marty McDonald]

Beautiful mixed metiphor there Aaron with "**** Kickers!" Did you mean Ar*e lickers or Tyre kickers??

I don't look for SMSF buisness, I don't agree with the concept and for once I agree with Token as I think its all a little too cavalier. The whole non recourse thing is total BS too with directors guarantees making it full recourse. Super will be made gearing free soon IMO. Just needs one ot two SMSF's to blow up and a lender to call on their guarantees..

 

[Token Funder]

Beautiful mixed metiphor there Aaron with "**** Kickers!" Did you mean Ar*e lickers or Tyre kickers??

I don't look for SMSF buisness, I don't agree with the concept and for once I agree with Token as I think its all a little too cavalier. The whole non recourse thing is total BS too with directors guarantees making it full recourse. Super will be made gearing free soon IMO. Just needs one ot two SMSF's to blow up and a lender to call on their guarantees..

I'm with you on the directors' gaurantees. I'll admit to being pretty concerned about the SMSF products offered by lenders that might look to technically comply but, by virtue of having the parties most likely to be contributing to the fund on the hook for any shortfall, in reality have the effect of placing the sustainability of the fund at risk.

As a lender, I'm of the view it should be completely non-recourse or you simply don't play in the space.

Can't see the regulators taking that long to cotton on to the implications ....

 

[MIW]

To follow up the story at last, last year, we have purchased 2 IPs via our SMSF with borrowing.
Yes, required 2 custodian/bare trusts but since we did a lot of co-ordination ourselves it wasn't as costly as I thought (Just beware, if you don't know what you are doing it can become costly!).
The loans are 80% with St. George and with off-sets accounts. Interest rate I would presume 1% higher than normal variable housing rates (around 6% - this will depend on your SMSF situation). Bank's legal fees were about $2,200. Financial adviser free (since working with our accountant). Accountant set up trusts with company trustee for $1,650 (this will vary, right?).
Other costs as per standard purchases when buying a property. Overall, we fitted below $4000 so not $8000 as previously thought. Security was the property and Guarantees were the custodian trust with us the Trustees as personal guarantor(s). Since we are self-employed all the banks always required this from us even for non SMSF borrowings.
Only needed to provide SMSF financials (no business, or personal) so this helped with minimal paperwork (but I would presume our situation was different to most as we already owned SMSF properties outright with no borrowing).
Basically, I am unsure why I took so long to act on it, but better late than never, right?

 

[Paul@PFI]

Interesting side note, there are moves afoot to redefine loan products for SMSFs (i.e. limited or non-recourse) as financial products under the Corporations Act, which would have the effect of banning mortgage brokers from being involved in sourcing credit for them.

It's up for consulation athe the moment, but if it goes through, broikers won't be able to be involved unless they go out and get themselves as AFSL.

STG and most other lenders already require a financial planner and even an accountant sign off. It sounds so easy ...A planner will want to ensure the clients are very prepared and knowledgable.

 

[Redwood]

Hi Paul, the Financial Advice Certificate from BOM/STG will require someone who is RG146 accredited, which does not have to be a planner. Rubbish certificate in my view.

Great to see that the loan process went well. Some great rates at the moment, we are using La Trobe for all our loans at the moment, awesome rates and awesome service, overall a positive client experience.

Cheers, Ivan