Self-Managed Super Fund lending, known as a Limited Recourse Borrowing Arrangement (LRBA), allows you to utilize some of your superannuation paired with a SMSF loan to acquire an investment property.
All rental income and capital gains is returned to the Self-Managed Super Fund for the sole purpose of increasing your wealth for retirement, not accessible now.
Investing your super and acquiring further funding has some limitations compared with standard lending.
All SMSF lending needs to show long term benefits, ensuring your super is well invested for retirement.
Lender limitations when acquiring an SMSF loan
Example: If you are interested in a property in Ballarat, you may be required to have a 60% LVR, which will require a 40% deposit plus stamp duty. If you buy for $600,000 your 40% deposit is $240,000 plus stamp duty. The funds for your deposit and stamp duty must come from within your SMSF.
SMSF Borrowing Capacity Calculation
SMSF Annual Income (Employer Contributions plus voluntary contributions)
Assumed Rental Income
= Borrowing capacity
How will the Lender view my income and calculate my borrowing capacity?
The lender will calculate your SMSF income based on your contributions annually.
1. If you are PAYG (an employee) your annual Self Managed Super Fund income is calculated on the amount of Superannuation Guarantee paid annually for 2 consecutive years by your employer to your SMSF.
If you have had a pay rise in the last Financial year, the lender will consider the lowest amount contributed for the past 2 years.
for example in financial year ending 2019 you were paid $23,000 in super however in financial year ending 2020, your were paid $26,500 in super, the lender will take $23,000 as the SMSF income and use this to determine your borrowing capacity.
2. You can also make Salary Sacrifice or voluntary contributions to increase this income, which needs to be made for a minimum of 2 years with the view to continue this year on year.
3. This can then be increased based on the number of members contributing to the SMSF. If you are a couple, both super contributions will be included in the calculation.
1. If you are Self Employed your annual Self Managed Super Fund income is calculated on the lower amount contributed annually for 2 consecutive years to your SMSF.
For example in financial year ending 2019 you contributed $23,000 however in financial year ending 2020, you contributed $24,500 in super, the lender will take $23,000 as the SMSF income and use this to determine your borrowing capacity.
2. This can be increased based on the number of members contributing to the SMSF. If you are a couple, both super contributions will be included in the calculation.
The Lender will then add 80% of the assumed rental income, calculated from the valuation of the property, if you are purchasing.
Self Managed Super Fund Compliance
Whilst investing your super in Property could be a strategy to potentially to grow your wealth for retirement, you are also exposing your SMSF to further risk from a lack of diversification and other potential risks of investing in property.
The Australian Superannuation scheme is designed to protect you from loss of income during retirement and for this reason your super is heavily guarded by law.
Here are some links to the ATO website, where you can find more detail on the repercussions of not following the SMSF guidelines: