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SMSF and home loans: do you know the difference?

SMSF and home loans

Securing the right loan for your property investment is essential. Using an SMSF loan to invest in property can be a great way to grow your retirement nest egg without risking any of your other SMSF investments. But what exactly is an SMSF loan and how does it differ from a standard home loan? We explore everything you need to know below…

What is an SMSF loan?

A self-managed super fund (SMSF) loan is a type of home loan taken out by an SMSF to buy or invest in a property. All returns on investment, such as rental income, are received back into the SMSF to grow the trustee’s retirement savings. For example, if an SMSF wants to purchase a commercial building but does not have enough capital to buy the property, the SMSF can take out an SMSF loans and borrow enough money to complete the purchase.

What is a home loan?

A home loan, sometimes referred to as a mortgage, is a loan taken out from a bank, or another financial establishment. A home loan can be used to buy or build property or to finance renovations to an existing building. There are various types of home loan available and they are usually secured against your property or other assets.

What are the differences between an SMSF loan and a home loan?

1. They follow different recourse structures

In the event an SMSF fails to keep up with the SMSF loan payments, the lender only has the right to recourse the security property and is not able to claim other SMSF assets due to the Limited Recourse Borrowing Arrangement (LRBA).

2. SMSF loans cannot be taken out by individuals

Any investments or loans taken out to invest in property must be in the name of the fund, not the name of an individual. Therefore, only Corporate Trust registered funds can invest in a property with an SMSF loan.

3. It is harder to find an SMSF lender

As the big four banks in Australia have disassociated themselves with SMSF lending, it can be harder to find an SMSF loan provider. However, there are many private lenders based in Australia who are willing to provide SMSF lending. Home loans are regularly available from both private lenders and larger banks.

4. An SMSF loan may require an SMSF loan specialist

Unlike a home loan, applying for and using an SMSF loan may require the guidance of an experienced SMSF loan broker. This is to ensure your loan is compatible with your SMSF and you understand fully the terms and conditions of the SMSF loan.

5. There is less freedom with an SMSF loan

A home loan can be used for renovating or building a property while an SMSF loan permits changes that are crucial to the property’s function only. This means that if you invest in a property with an SMSF loan you are unable to make any structural changes, such as adding an extension. It is important to consider this when taking out an SMSF loan as it would be unwise to use an SMSF loan to invest in a building that needs renovating immediately.

6. Interest rates can be higher on SMSF loans

With any loan, your interest rate can vary depending on the lender, the sum of money you need to borrow and how much of the down payment you can afford. In general, SMSF loan interest rates are higher than home loans due to their complexity as each SMSF loan usually has unique terms and conditions.

Investing in a property with an SMSF loan can be financially rewarding, providing the investment fits with any of your existing SMSF investment strategies. Using an SMSF loan over a home loan can be a more secure way to funnel capital into retirement savings, provided the proper processes and regulations are followed.