Pre approval stage for a IP inside SMSF

Hi team,

I am looking at purchasing a property inside my SMSF which is currently managed by Sequoia. A buyer's agent has referred me to their mortgage broker which has sent me an email with regards to fees which I thought was a little unusual, see below:

"After reviewing the information provided, I would like to recommend the following to facilitate a purchase of up to $420,000 (in QLD):



Lender – La Trobe
Loan amount - $336,000 (80% LVR)
P&I variable rate – 5.99% p.a.
Application fee - $995
Lender legal fee - $995
Valuation - $330
Settlement fee - $250
Brokerage (our fee) - $1,650
Ongoing - $15 p.m."

I was under the impression that mortgage brokers make their money from the lenders? Or is this different because it's inside an SMSF? Are these fees normal?

 

You would need to ask the broker that. Some charge.

 

Sounds dubious. Who initiated this? If ANYONE introduced or suggested a smsf and loan. Stop. Walk away.

 

I don't charge brokerage but at least they are upfront!

Who sold you the property?

Re the broker, they have recommended LA Trobe and suggested a 80% lvr, this would be very concerning for me as the rate is more expensive and you have valuation risk at settlement.

For a loan this size i'd suggest other brokers would not charge brokerage so shop around, particularly if its a preapproval. The La Trobe servicing cal is pretty straightforward and a pre approval is not worth the paper its written on if its "off the plan" with more than 3 months to settlement. Valaution risk is high with 80%. I generally don't want my clients going over 65% LVR these days as this will provide the base rate and most lenders over 65% it is more expensive.

Hope that helps

Cheers Ivan

 

It might also be worth looking at Liberty - they do 5.2% at an LVR of 80%. They do have a lot of fess as well, but still might be a better choice.

 

A 80% LVR may be a poor choice for a smsf. The interest and other costs may create a high level of neg cashflow (cashflow burn) requiring additional cashflow for the fund to be sustained. ie contributions will be consumed and the fund then cant grow and cant diversify and become a one trick pony. This could also mean if a tenancy stops the fund has a risk it cant manage.

Borrowing in a smsf is very very different to any other entity

 

Naturally thats factually true, but why?

 

Thank you, that is certainly a scenario that does not look very nice to be in.
It seems with the higher interests rates and all the other fees of maintaining an SMSF I can definitely see this being a likely scenario.

 

Also think about its affect on serviceability outside super

 

I bang on about it a bit and didnt give details (again). For those who want to understand this view as to why borrowing in a smsf is different to any other entity you should consider:

• The high interest rate
• High lender fees
• Few lenders (non bank). Refinance is problematic and uncompetitive.
• The need to use a smsf and its costs may exceed typical member costs in other super options. Especially a fund with a single predominant property asset and borrowing.
• High costs involved in the smsf trustee company, custodian trustee company and trust establishment not required for other buyers.
• Death issues and continuity of property ownership problems. eg A member balance must be CASHED after death. The fund may have to consider compulsory sale. This is a specific smsf issue and illiquid property sale issues could further expose the fund to selling in a market it doesnt want to sell in.
• The low LVR (dont be fooled by "up to" 80%)
• The need to fund from cash the high legals, approval process, duty, legals, and the balance after loan
• The need for all members to provide a personal guarantee as well as the SMSF mortgage
• The tax rate of 15% which applies to negative gearing makes neg gearing a very poor "return" vs ownership in personal names and a marginal tax rate of up to 47%. The tax benefit is three times that of a super fund
• The ultimate presevation problem. If a short / medium property growth is obtained and the property is sold the profit is preserved and cant be accessed.
• The fund also cant use growth equity to borrow again. Personal owners can refinance and cash-out one property to assist a deposit on another.

Notice too that some of the above matters cant be advised on by a broker or real estate participant. They are technical financial advice.

With respect to the LVR its wise to consider a smsf should not borrow 80% except in very limited instances. At a 80% LVR its likely that very high cashflow burn will occur for the fund. The fund would "consume" cash to preserve and retain its asset. And if the fund experiences a loss of rental income it could be a further peril. The fund cant borrow to cover its repayments. Hence its a poor income return. The very benefit of super is its low tax rate. So it makes sense to target POSITIVE gearing, not negative gearing. The fund may need to maintain contributions which are consumed and the fund balance doesnt grow. Its like putting banknotes into a fireplace to keep warm.

Its often a desirable strategy to consider the rental property income and expenses (incl depreciation) and then work back to a neutrally geared net income and limit the borrowing (often 50-60%). This will then allow contributions to grow the fund and divesification, improvements (granny flat ?) can then occur.