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SMSF borrowing costs

Discussion in 'Property Finance' started by JohnPropChat, 27th Jul, 2016.

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  1. JohnPropChat

    JohnPropChat Well-Known Member

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    I've a keen interest in SMSF but don't have enough funds so I'll be in learning phase for a couple of years. What are the typical costs for buying property in SMSF?

    Accountant fees:
    Bare Trust setup and financial advice certificate - $2000 to $2500
    Stamp duty on security trust - Upto $500. Depends on the State. WA is $0 but is that for Trustee in WA or property in WA?

    Lender Fees:
    Loan application & valuation fee - $1000 to $1500
    Bank legal fees - $1500 - $2000

    All up, $4500 to $6500. Does that seem about right? On a $300k property that is about an extra 2%, similar to LMI on high LVRs.

    Yearly admin/tax fees will go up a bit and there is a $260 levy on corporate trustee for the Bare Trust, I think.

    EDIT: Split the costs into lender fees and Accountant fees, thanks Shahin_Afarin.
     
    Last edited: 27th Jul, 2016
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  2. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    There isn't any valuation fees unless we are talking about a commercial property or multi unit site (provided of course the site cannot be subdivided as that conflicts with the act).

    Lender fees are around $2,500 depending on the lender and different lender will call it different things, application fee, solicitor fee, trust deed review fee, etc.

    Can't stress the importance of having an offset facility within SMSF lending as you are unable to pull out equity with SMSF loans.

    Also note that most lenders will require 10% liquidity after the settlement of the property.

    SMSF and Bare Trust set up are accountant fees - the lender doesn't set this up. The accountant only sets up the BT once you have found the property.
     
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  3. JohnPropChat

    JohnPropChat Well-Known Member

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    There still seems to be a few lenders left without the 10% requirement. I think, JacM mentioned a few in one of the threads.
     
  4. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    St George is the only lender I am aware of that doesn't have the liquidity test provided that max LVR is 75% and servicing is at 1.2 (i.e. your servicing must slay big time).
     
  5. Redwood

    Redwood Well-Known Member

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    Hi there,

    Interesting and lets revisit this topic which may have been covered previously.

    Accountant fees: depends on which structure you choose, we always set up with a corporate trustee for smsf plus bare trust, which all up is $2650.

    Lender fees: this varies, generally for resi lending the valuation is $302 for metro areas and more for regional. For commercial its $1000+ depending on the valuer. App fee will generally be at least $1000 for instance St George is $1500. La Trobe 0.75% of loan amount, Big Sky $1000 inc valuation and so on....

    Legal fee vary and its important to have a good legal provider, cutting corners with online providers will leave you exposed and can be costly in both bank fees and settlement delays. We use Nowinfinity legal and they get through all bank lawyers and we know al the lawyers in any case. La Trobe will be $2000 plus and vary between resi lenders.

    Companies: SMSF trustee is a special purpose company so attracts a discounted rate - this cannot trade. The bare trustee is a standard company and attracts the normal rate.

    Stamps: important....and will depend on state and if completed / established or off the plan....include this in your calcs....

    Servicing is not like any other loan...its based on contributions and your balance, not just your payslip....assessment rates vary by lender.

    La Trobe and Big Sky do not require a liquidity test. Big Sky has no ongoing fees and has an offset. However, they will offer their product to the market as they maxed out their investment lending so its exception only. Their product is great though. St George is $12 a month v Big Sky no ongoing fees. St George max LVR is 70%

    Re not enough funds....well thats when an effective contribution strategy comes into play, use your concessional caps effectively...until scott morrison takes them away!

    Note in some states especially QLD the bare trust is required to be set up before the contract is signed and i'll insist on the bare trustee company being established prior to contract date for all states. In fact - there is a requirement that the bare trustee is in place prior to signing the contract....something many miss....
    Hope that helps

    Cheers Ivan
     
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  6. JacM

    JacM VIC Buyer's Agent Business Member

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    Last time I did a sift around, I noted:

    • BOQ had a really contrived liquidity calc
    • Liberty was also contrived, and they take approximately a million years to even pick up the file
    • VTMU had no liquidity calc, but affordability was based on the SGC and 80% of gross rental income. Voluntary contributions would be considered if contributions had been underway for at least 12mths.

    With that said, these findings were from a quick ring around and not actual applications. The brokers that are writing these sorts of deals every day are far more equipped to comment on what each lender is doing/allowing "as at today".
     
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  7. AlbertWT

    AlbertWT Well-Known Member

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    @John are you planning to invest in NRAS using SMSF or just normal residential existing property ?
     
  8. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks guys. LaTrobe looks brutal with a 6.59% rate. Big Sky looks interesting but may have to go through someone with "connections" to get in?

    When borrowing in SMSF is there a downside to going with non-bank lenders? Would that affect the credit file with regular lenders outside of super?
     
  9. JohnPropChat

    JohnPropChat Well-Known Member

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    Just learning at this stage but if I am ready to go, I would probably pick a house with good CG prospects rather than NRAS. Not to say NRAS won't have good CG but they usually come at a premium and can't really add value as they are already brand new but the extra income could be useful for servicing calculations both initially and also pay down debt. Must suit your strategy.
     
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  10. Redwood

    Redwood Well-Known Member

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    John - when we recommend a non-bank lender - its usually for a certain reason. I usually explain who La Trobe is who who Big Sky is. Big Sky for instance is owned by Australian Unity, a known company and is stable. La Trobe is a regional lender that has been around for over 70 years.

    For instance, Macquarie do 80% - but require a $200k min balance. If its off the plan they will do 80% however, won't do the deal if the valuation is off by > 5%. They have liquidity. Rate is 5.6% - then you may go La Trobe is you have a credit default, they are now 6.59% as they have slowed down the SMSF business significantly. We still do a heap of deals there for suitable clients.

    In all SMSF lending is different - not everyone does it and eligibility will depend. Its even more interesting when it comes to commercial smsf. Even more interesting with agribusiness which I love! Cheers, Ivan
     
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  11. albanga

    albanga Well-Known Member

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    Latrobe from my research has no liquidity, no minimum balance (just have to be able to cover a period of like 3 months payments) AND they will accept only 1 years contributions which is a biggie!
    Allows you to load the super fund for 1 year as opposed to most others that want to see 2 years.
     
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  12. Redwood

    Redwood Well-Known Member

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    Hi Albanga - spot on - however they have a liquidity test for off the plan in SMSF and limit LVR to 60% - as of December 2015 from memory.

    Cheers Ivan
     
  13. JacM

    JacM VIC Buyer's Agent Business Member

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    Remember that getting into a SMSF loan is pricey (the bank charges a hefty fee to read the deeds, for instance). As such you won't be wanting to refinance at all or very much. You're kind of in it for the long haul, so choose wisely.
     
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  14. JohnPropChat

    JohnPropChat Well-Known Member

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    Speaking of legal fees. Are the exit fees also much higher when the property is sold and mortgage discharged?
     
  15. JacM

    JacM VIC Buyer's Agent Business Member

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    @JohnPropChat ... Not sure... they don't need to read trust deeds to discharge I wouldn't have thought, but the specialist SMSF legal division probably have to be involved, so it might be a bit higher. The brokers could comment further on this.
     
  16. AlbertWT

    AlbertWT Well-Known Member

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    Well, if that's the case then SMSF investing seems to be for a seasoned investor with large cash in the super fund rather than beginner investor.
     
  17. euro73

    euro73 Well-Known Member Business Member

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    I intend to use NRAS - and soon will be using dual occ, to defeat the 500K lifetime caps that are coming , and to build a large passive income through Super . Let me give you an example of what I mean;

    Lets assume we have a couple with an SMSF balance of 200K, there are 2 members earning 100K each, and they buy a 400K NRAS approved dwelling , and use STG at 70% LVR so they can have the offset account and so they are allowed to buy new stock.

    The loan would be 280K. ( 70% of 400K) The SMSF would provide the 30% deposit + stamp duty required , which would be @ 135K. So they'd have 65K of their 200K balance available to diversify into other assets if they wish.

    Each members employer is contributing @ $9500 towards the fund already. The property will add @ 9K in after tax earnings to the fund. That means the fund will be receiving @ 27-28K per annum, so they should be able to build the offset balance up to 280K in approximately 10 years.

    Looked at another way, 135K has now turned into 400K of asset value, in 10 years. That's almost triple the 135K in 10 years, with ZERO growth factored in. If the asste has grown just 50% in 10 years to 600K, the 135K they put towards the asset has now grown 444% in 10 years!

    After 10 years the NRAS ceases, the property reverts to full market rent. With just 50% rental inflation in 10 years, that could be as much as $600 per week, or 31.2 K per annum. These are EARNINGS within the fund, not CONTRIBUTIONS to the fund, so they will not form part of Mr Morrisons 500K lifetime non concessional cap.

    If you had already purchased 2 or 3 NRAS outside of super, and had used the surpluses to have paid your PPOR mortgage off in full in that same 10 year time frame...look at the position you'd be in.

    1. Unencumbered PPOR
    2. Your NRAS properties( outside super) would now become non NRAS, and would revert to full market rent, and would be running under their own steam. So you'd have a debt free home and a nice portfolio which is costing you nothing to hold on to.
    3 This would free up large amounts of cash flow that would otherwise have been set aside to pay the PPOR mortgage for another 15-20 years. It's now freed up to use for other purposes. That me be more property, or it may be super... or a mix of both. Each member of the fund may choose for example to start to salary sacrifice an additional 15K to super ( in addition to their 9.5K employer contribution) so they are both contributing 25K each. Or 50K per annum.
    4. Your NRAS property( purchased through super) would also be adding a further 31.2K of income. After allowing for 15% tax and costs for management, rates etc, the net amount is likely to be closer to 23 or 24 K.
    5 So you could be putting 50K of contributions in, and earning another 25K in earnings.... 75K per annum.
    6. If you then purchased a 2nd property using Super, that level of income would allow you to pay it down in less than 5 years. Now you'd have 50K in contributions, and 60K+ in earnings from the 2 properties.
    7. Then buy a third, and it would be paid off in 3 - 4 years. Now you;d have 50K in contributions and 90K + in earnings from the 3 properties.

    This beats the 500K lifetime additional contributions limits. earnings are not contributions.

    Using a dual occ property, the same can be achieved. You'd need to spend a little more though - potentially 500K or thereabouts. And you'd have to invest in regional areas. The aim of the game is not to generate the biggest growth though. This is what I find the biggest mistake of most investors- an addiction to a growth only strategy. The aim of the game is to generate the biggest income and pay down the debt, go again, pay down the debt, go again... as above.

    Equity wont feed you. Cash flow/income will.

    If you employ a dividend reinvestment approach using NRAS or dual occ, the numbers are there for all to see...

    This is how I intend to build a passive income for life inside super.... whether you feel it's of value to you is for your own consideration. What amazes me of course is how blind to the potential of property most planners are. I bet if most people took this approach to their planners, theyd be lampooned and told to stick their money in the usual asset classes, earning a miserly diddly squat. Gotta take control of your own destiny. Planners and the superannuation industry wont get you anywhere near where you need to go.
     
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  18. JacM

    JacM VIC Buyer's Agent Business Member

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    @AlbertWT ... the power of leverage is one of the big appeals with respect to acquiring direct property inside a SMSF.
     
  19. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    There are strict rules in place in regards to altering the security in an SMSF so "adding value" may not be an option.

    Set up costs vary depending on the structure. We advise an allocation of 10k to cover set up costs.
     
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  20. euro73

    euro73 Well-Known Member Business Member

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    Colin is correct....



    Keep in mind as well - the lifetime extra contributions cap being proposed by Govt is a game changer. For mine, it makes cash cows like NRAS or dual occ even more critical and appealing now.

    Think critically about your super balance, and what you will need to retire comfortably. Think critically about how your super has performed when left in the hands of "professionals" since the GFC... sure, some years may have been good, but take a look at where you have moved since 2008/9 though. You'll be very shocked.

    I dont want to rely on a massive global economic boom /recovery to be able to retire comfortably. I dont want to rely on the boards and investment teams at retail funds, who invest in traditional shares, cash and bonds and REIT's.

    The world is carrying far too much debt. If 8 + years of unlimited money printing, rate cuts and now negative interest rates i9n the US and UK and Europe hasnt kick started the world economy yet, do you really believe anything will get remarkably better in the coming 8 - 16 - 24 years? What do you believe is going to change? Where is the magic bullet? The debt is just sitting there like a hguge dead weight around the worlds neck.

    Add to that the political deadlock around the world on just about anything and everything
    The only thing they all agree on is that we have lots of kicking the can down the road.

    Locally , we have budget emergencies then we dont. We have no ambition to borrow to build infrastructure. Now we have had consecutive quarters of record low inflation... and make no mistake we are heading towards ever falling rates and are going to be in the same flat, blah type of growth pattern as the Northern hemisphere has been in for the best part of a decade.

    I have zero faith in political leaders to do anything other than pontificate and procrastinate, while getting very little done. For all these reasons I just dont believe the results of the past will be repeated in the future. So Im focused on taking control. I want 6 figures - or close to it - of passive income from my super, and I need to own 2 properties earning me 50K per year , or 3 earning me 30-35 K per year to do it.
     
    Last edited: 28th Jul, 2016
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