Borrowing within a SMSF, personal guarantees and other things

If a person sets up a SMSF, and buys a single property with a loan of ~60-80% LVR (secured against the property):

(Rest of the SMSF will be in passive ETFs with zero borrowing)

1) Is it standard practice for banks lending to a SMSF to ask for personal guarantees from the beneficiary?

2) How does the bank assess servicability? Do they look at the cash flows of the SMSF in isolation, or do they look at the full financials of the main beneficiary? The answer to this may depend on whether a personal guarantee is required? Do they seek any other undertakings from the beneficiary?

3) Do the banks offer normal resi (investment) rates to SMSFs for property purchases or is there an additional margin they would generally apply when lending to a SMSF?

3) This is a ‘how long is a piece of string’ question but do brokers find that arranging loans for a SMSF substantially more diffficult and complex than a plain vanilla residential purchase by an individual (eg. Is it more like commercial borrowing where approvals and T&Cs are substantially different to resi?)

Interested in getting the thoughts of accountants and mortgage brokers who have dealt with this type of borrowing.

 

1. Yes
2. Income of the fund and rent.
3. Higher rates and fees.
4. Not really much more difficult

 

Thanks Terry. So on the income, they would take income (rent) from property + dividends from remainder of fund + average contributions from beneficiary per year.

On the margin, I just want to get a feel. Is it in the order of 0.5% above.

 

Yes

I haven't done a SMSF for a while but you are probably looking at around 6%

 

Not all contributions are counted in servicing and they likely wouldnt consider all of investment income unless its stable and proven. Some employers wont contribute to a SMSF. Some members also cant rollover to a SMSF. Many lenders want to see actual contributions rather than a new fund which may or may not receive them. The fund would need a ESA and be a complying fund tand that takes time to flow through. You cant setup a fund and buy a property a week later.
Also clearly understand what the rules are so you dont commit a offence too. No related parties can rent from the fund etc.

A high LVR may also be a cashflow comsumer. A SMSF shouldnt have a high LVR if cashflows are negative.and neg gearing is not a desirable thing in super. It means contributions and cash are consumed. Banks also have a cash buffer requirement for SMSF - to address the problem that once it wons the property it may be impossible to sustain cashflow if a tenancy issue occurs and there are no contributions (eg loss of job etc). Ideally you want to determine how much of a loan needs to be to arrive at a cashflow neutral acquisition.

The costs of maintaining the SMSF need to be understood and compared with what you jhave now. Typically allow $3K a year to be safe. If you want life cover in a SMSF expect to pay far more than an industry fund. Failing to maintain life cover could also be a mistake too. A SMSF must consider life cover for members as part of its investment strategy.

Many people think of a SMSF and then when they follow a process to consider the financial implications find they really have insufficient funds for a sound investment outcome.

 

Hi there

SMSF lending has changed significantly and they will require a personal guarantee (limited recourse) - that is to the extent of the asset you buy. Your super must be protected in accordance with the spirit of super law.

Re serviceability - depends on the lender, if you are self employed they will look at your financials and generally will be 12 months of contributions plus rental income. Loan will be lower of contract price or valuation. Max loan is 80% but can count of my fingers the lenders that do 80% these days

Re rates they vary CBA is 6.03 and St George is 6.57 and vary across the board. This is unfair in my view.

I find SMSF loans easier than resi loans. Thats just me, we have a rhythm with them and less compliance that resi loans.

Hope that helps

Cheers Ivan

 

Whats the best rate on a standard investment loan P & I? based on that rate in the 4's please explain to my a premium such as above?

2010 SMSF were new - sure, all the risk in limited recourse, mortgage docs - accountants - lawyers and brokers has been covered for many years - so why the 200 BP premium?

Cheers Ivan

 

Putting aside whether these rates are ‘fair’, I always say to people that don’t assume things in the commercial world are always fair. Keeping that front of mind at least helps to keep the frustrations at bay and to stay on an even keel.

 

The banks need to make extreme profits somewhere so they can keep paying good dividends to surrender.

That said it sounds lime collusion to me. Banks getting together and agreeing to maintained artificially higher rates.

 

Well that might raise a few trade practices issues then...

 

So does the personal guarantee impact your servicing outside the SMSF at all? I would hate to set one up and have it limit my ability to borrow outside super

 

It depends on the lender - most lenders don't factor the debt in your personal liability position.

The big lender that does include it in your personal liability position is CBA. NAB do this as well but consider it as an exception.

As a side note (not related to SMSF's) Westpac doesn't look at any liabilities in a company name within the retail (non business) channel. So in other words if you have 2 loans with CBA under a company name then they don't factor these loans in your servicing.

 

APRA use capital adequacy tests that involve greater asset provision than other loan types. This impacts funding costs significantly (which is why Banks didnt push for SMSF loans that hard) and so the customer has to pay more for the bank to keep its expected risk weighted margin. Unlike say credit cards which has no cash that must set aside SMSF loans require liquidity reserves which could be very high v's owner occupied and similar loans. Note that this view was in 2013 and hasnt been modified despite 5 years of evidence

http://www.apra.gov.au/adi/Publicat...ans-to-self-managed-superannuation-funds.aspx

 

When trustees sign personal guarantee isn't that factored into serviceability outside SMSF? Are SMSF personal guarantees usually secured or unsecured?

 

Are we talking Pepper's and Liberty's of the finance world or private mortgages? Any pointers?

 

Many lenders don't take into account a guarantee as the individual is only liable if the SMSF doesn't pay.
Personal guarantees are unsecured.

 

Why don’t you contact him directly?