SMSF Loans in 2017

More Australians are opting to fund their investment property using their self-managed super fund (SMSF), according to statistics released by the ATO.

Based on the ATO’s data, the number of SMSFs has increased by 25% over the last five years and SMSF lending-based property assets as a proportion of total assets increased from 3.51% in 2012 to 21.17% in 2017.

With $2324.4 billion in superannuation assets as of July 2017, according to statistics from the Australian Prudential Regulation Authority (APRA), potential for further growth in the SMSF market exists.

As more Australians turn to SMSF lending, it’s important to understand the options available and to weigh up the pros and cons.

To make this a little easier, Canstar has compared 69 SMSF loan products to determine the products that represent outstanding value using our Star Ratings.

To give you an idea of the SMSF loans available, below is a table ranked by Star Rating based on a $350K variable loan in New South Wales.

Compare SMSF Loans

What is an SMSF loan?

An SMSF loan is a specific type of loan that provides trustees with access to borrow funds for the purpose of investing in property for the SMSF.

The property will be held in a separate trust until the loan is paid off. It’s worth noting rental income cannot be disposed of by a trustee or given as a pre-retirement benefit to a member of the fund – it can only be used to increase the retirement savings that will eventually be paid out to members once they retire.

Further, the property cannot be acquired from, lived in or (except in very limited circumstances) rented out to a fund member or any of their related parties.

Investing in property within superannuation is not as straightforward as investing outside the superannuation environment. All investments need to be in the best interests of fund members and in accordance with the laws around SMSF borrowing.

5-Star product VS market average

When comparing SMSF loans, Canstar Research found the difference between the top-rated products and the market average could be over $25,000 over a 20-year variable loan.

SMSF Loan Interest Rates
Variable 1 Year Fixed 2 Year Fixed 3 Year Fixed 5 Year Fixed
Products Rated 15 14 13 13 14
Min 5.69% 5.15% 4.89% 4.99% 5.40%
Max 7.99% 6.44% 6.44% 6.54% 6.84%
Market Average 6.45% 5.98% 5.96% 6.03% 6.33%
5-Star Average 5.94% 5.32% 5.21% 5.24% 5.56%
Source: www.canstar.com.au
Based on a $350,000 loan at 70% LVR. Only SMSF loans considered in Canstar’s SMSF Loan Star Rating have been considered. Rates as at 30/10/2017.

 

SMSF Total Cost
Variable 1 Year Fixed 2 Year Fixed 3 Year Fixed 5 Year Fixed
Products Rated 15 14 13 13 14
Min $240,456.54 $216,153.54 $204,426.01 $206,285.94 $210,487.45
Max $357,021.97 $277,329.88 $276,476.57 $278,066.64 $277,837.94
Market Average $276,788.05 $254,069.40 $251,836.12 $251,907.67 $250,743.42
5-Star Average $250,837.19 $222,613.99 $216,660.56 $214,991.76 $214,640.91
Difference between 5-Star and Market Average over 20 years $25,950.86 $31,455.41 $35,175.56 $36,915.92 $36,102.51
Source: www.canstar.com.au
Based on a $350,000 loan at 70% LVR with P&I repayments over 20 years. Only SMSF loans considered in Canstar’s SMSF Loan Star Rating have been considered. Rates and fees as at 30/10/2017. Total Cost includes interest, upfront, ongoing  and discharge fees and charges with rate reverting to a variable rate after the fixed term.

Compare SMSF Loans

Potential pros and cons of SMSF property investment

Pros

  • It can be tax-effective: As the preferred vehicle for retirement savings, superannuation receives concessional tax treatment. The earnings within your superannuation fund are taxed at only 15%, which is less than half the marginal tax rate paid by the majority of workers, and the earnings within the pension phase are tax free.
  • It can provide you with purchasing power: Your savings outside the superannuation environment, or even your individual savings within superannuation, may not be sufficient to invest in direct property. Combining your capital with the other members of your SMSF, though, may give you the purchasing power you need to invest.
  • Business benefits: While you cannot purchase a residential property to rent back to yourself or to any related party of a SMSF member, you can purchase a commercial property to lease back to your own business – provided you pay a commercial rate of rent.
  • It can provide you with control over your investments: Many investors relish having control over the investments they buy and the ability to “add value” to their investments via renovation or development (please note as a side issue that the ATO does not permit SMSF trustees fund renovation or development via borrowings).

Cons

  • Your SMSF may lack diversification: Diversification – the concept of not having all your eggs in one basket – is more difficult to achieve if your SMSF owns just one or two large assets. That lack of diversification may not be in the best interests of the SMSF members.
  • You cannot benefit personally from the property: Investments within a SMSF must be purchased via an ‘arm’s length’ transaction and must be maintained on a strict commercial basis. As such you cannot purchase from, sell to, or rent to a related party. Learn more about buying property with your SMSF.
  • You may lack sufficient cashflow: While you can borrow to buy property within a SMSF, you cannot borrow to build or improve the property. Ensure that your level of contributions plus the rental income will be sufficient to cover any costs that you will need to meet from cash.
  • Liquidity at retirement: When your superannuation transfers to the pension phase you will need to ensure you have built up a sufficient amount of cash to fund the required pension payments without risking a fire sale of the property.

Finally: there are many small details to be aware of when it comes to investing within a SMSF. Do your research and seek professional advice. You can also seek assistance from an SMSF administration firm where necessary.

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