Single Contract Properties for SMSF's

SMSF Lenders

So you’re looking at buying a property with your super or are looking for a potential SMSF lender? Purchasing an investment property through your SMSF is a strategy that people choose when determining where to invest their funds for retirement. 

It has a wide range of pro’s and con’s however most of all it requires research, understanding how it differs from investing personally, and accepting the benefits and pitfalls that can be expected.

Of course you don’t have to go this alone. Our team can assist you with both the property selection and financing side of the equation. Also, if you don’t have one already, we can also introduce you to a range of independent financial planners who can assist you with establishing your fund, conducting a rollover etc.   

On this page we are not providing advice or going through the very intricacies of what it means to operate an SMSF. We are simply going to take you through the things that our finance team has often experienced when helping clients to secure a property for their SMSF, be it with relation to SMSF lender finance or securing the propertySo.

Current SMSF lending landscape for buyers

Over the last few years the number of institutions with an appetite for SMSF lending has diminished significantly. We have seen the big 4 (CBA, ANZ, WBC, NAB) more or less remove themselves, as well as the likes of Macquarie bank. This has narrowed the SMSF lenders field and now competition is only amongst a few small to mid tier institutions. 

SMSF lender policy has also tightened. An increased caution from these lenders due to what is know as the “limited recourse borrowing arrangement” linked to buying a property in an SMSF has led to an increase barrier to entry for potential SMSF property investors. 

Remaining lenders have now put in place requirements such as an SMSF needs to have a balance greater than a predetermined value (ie:$150,000). Once a purchase is completed they might also require the SMSF to have a certain amount of funds remaining ( aka liquidity threshold). And in the event that a fund does not meet the liquidity threshold, then they may charge you an additional fee to offer themselves some more protection. 

Therefore if you were buying a property for $400,000 in your super, the bank may only be willing to lend you $400,000 x 0.60 = $240,000 meaning that you will need to come up with the remaining $160,000 plus costs.

Also, depending on the property you are looking to buy some lenders may only be willing to  lend 60% against the value of the property. This conservative approach to lending can come down to numerous factors including the type or location of the property being purchased. 

In saying this, there are many scenarios where you can still borrow up to 80% of the deemed value of the property, the above example is just a worst case scenario to help you prepare for any potential challenges.

Timeframes - 0 to 100, how long will it take?

This is rarely a speedy transaction from start to finish. If you have the SMSF already set-up then this can reduce the amount of time this will all take, however, if you are starting from scratch then it’s not uncommon for the whole process to take more than 5 months. 

Setting up the SMSF and rolling the funds over will take a number of weeks not to mention the establishing of the Bare Trust. Then you have the loan assessment and approval to contend with.

Estimated time of build

How are SMSF Properties Valued?

Valuations are also something worth mentioning as it relates to your new purchase property. Due to the conservative nature of the SMSF lending products, it’s not uncommon to see a conservative estimate in the valuation of your new property. 

Just because you bought your new investment property at a particular price, doesnt mean the bank will necessarily lend on this value. They may only be willing to lend on a value provided by an independent valuer, meaning that you will be left footing the bill for the shortfall. Not the end of the world for most, however this can be an issue for those with a lower SMSF balance.

Let’s give you an example. You purchase a new investment property at $500,000. The bank sends out one of the valuers on its panel to do an independent valuation on this property. They look at recent sales around the area, some superior and some inferior – and sometimes examples that are not remotely similar to your property in any way shape or form – don’t ask us why. 

Now,  if the valuer was to decide that the value of this property should be $430,000 (10% lower), then the bank will potentially only provide you a mortgage on the basis of this value. In this case, they might only lend you 80% of the deemed value of $430,000. 

This means that they will lend $344,000 and you will be left needing to contribute the additional $156,000. This means you would need to contribute $6,000 more than if the property came in at $500,000 and the bank was only willing to lend 70% of the value of the property to you.

Cost of SMSF and lending facility

Initial Costs Involved

Next up let’s talk about the costs involved. Setting up your SMSF and establishing the bare trust will cost up to $6,000 (however it could come in higher or lower depending on your financial planner).

Your lender’s will also charge a fee to establishment of the loan facility, which they do as a result of the heavy paperwork and lack of competition in this particular lending space. 

You will also need to pay a solicitor who will provide you with advice on your purchase and mortgage documents.

In general we would tell our clients to expect this overall process to cost somewhere around the $10,000 mark.

Be prepared for things like:

$ 1 k
SMSF Establishment
$ 1 k
Lender Fees
$ 1 k
Solicitor Fees
1 %
Liquidity Premium

Ongoing Costs Involved

The main thing here that we wanted to mention was the interest rate you can expect to pay on an SMSF purchase. 

On a normal investment loan you would be looking at ~3.40% to 3.80% (Principal and interestI). This is only slightly higher than what you would be charged for an owner occupied property. 

SMSF’s on the other hand can and do attract interest rates of 6% plus – so don’t be surprised.

Also, keep in mind that you will need to pay annual fees to keep your SMSF compliant. This includes things like auditing which is a requirement of the ATO for this type of structure –  speak with your planner about what this will look like for you. 

So is it worth it?

SMSF lending is not without its issues however is still a great way for people to enter into the investment property market and own some real assets that they actually control. 

Australian property has an incredible track record of providing long-term capital growth and regular income to those who have had the foresight, risk tolerance and patience to buy and hold it. No other asset class has provided so much wealth to Australians over the course of time, so yes it could make a very nice addition to your overall investment portfolio.

You do however need to enter into this type of purchase with your eyes wide open. As much as we all want this to be a smooth and speedy transaction so that you can start earning rent and seeing long-term capital growth, you will have to jump through some hoops to make this happen (and so will we). So what are you waiting for?

Join hundreds of satisfied customers

If you’re considering a property purchase and would like some guidance we’d like to hear from you. On a quick phone call we can help determine your current equity position, borrowing capacity, and we can start to discuss potential loan structuring. We can also help you in choosing a property thats going to deliver on your expectations over the long run.