SMSF Loan w/ Offset Account

Hi -

I am looking at establishing a loan to purchase a residential property within an SMSF. Ideally, I would like to have a lender that allows an LVR of 80% and provides an offset account but these are few and far between. Lenders that I have discovered which have offset accounts are BOM, St George, AMP, BankAustralia, and BigSky. At the moment only BigSky can confirm an 80% LVR (I'm awaiting confirmation from BanAustrali), the rest offer 70% LVR.

Can anyone else offer any other suggestions for lenders?

Thanks,

Robert

 

I wonder why a lot don't offer this. In curious.

 

@Redwood

Any thoughts?

 

Thanks @Coota9 for the mention.

The value of the offset account is underrated, particularly with a high balance fund with cash in the fund at settlement, this can quickly turn your property into positive gearing by reducing your loan interest. Powerful calculation in my opinion.

From the list you have provided (which captures all), each lender has different servicing and LVR as you mentioned. St George/Bom offers 70% LVR with 10% liquidity and tough servicing. Of course we are discussing residential.

AMP has just come back into the market and are feeling the industry once more, their rate is @ 5.87% and require a statement of advice with the loan so please factor that in to the cost of the purchase. Tough servicing to, so not recommended. BOQ does 80% as does Bendigo.

Bank Australia is the old Bank Mecu, they are quite small when it comes to the SMSF market and the SMSF Loan product was introduced by some ex Big Sky staff that transferred across. They do 80 with restrictions. Good guys based in Kew Melbourne.

Big Sky is the pick of the bunch, however their rate has increased this week - due to their off the plan niche and the amount of loans coming from our brokers!

They service inside the SMSF and offer 80% for off the plan and established and also have the offset so your list is right. We are doing a significant amount of business with Big Sky at the moment. With Big Sky - they require a financial advice certificate which is almost like a statement of advice, no planners will sign off on it without $$$, so be sure to be aware of this. Luckily, I can sign it safely, but can cause surprises for punters and brokers alike.

Macquarie, Liberty, Resimac do 80% LVR however no offset. Both Macquarie and Resimac require a min balance of $200k.

To my knowledge their are no others. Great list Robert - there is a list on our site to.

Cheers Ivan

 

Thanks Ivan for confirming.

I phoned BankAustralia this morning to enquire about the product and have been advised they are not accepting any new customers, as they have reached their 10% on the their Investment Loans book as set out by regulation; thus they are waiting for an increase in the residential loan book before taking on new applications. I was offered to be put on a waiting list, but this is not suitable given the timeframe of when I wish to invest.

I also found out that The Rock offered offset accounts until the new year (even though they still advertise on the web site). It appears the number of providers out there who offer an offset account with reasonable rates / costs are diminishing.

 

Generally speaking a 80% LVR loan almost always makes the IP negative geared which is a poor financial plan. The fund will rely HEAVILY upon contributions to avoid a cashflow burn issue. It may even deplete its own cash in full. Many lenders knock back these deals for that reason. The contributions will be consumed month on month and eventually the fund would not grow. The sole strategy of the fund is to survive...Not smart. Once the cash buffer is burned up the fund has NO alternatives available other than sale perhaps.

Ideally SMSF loans should be cashflow neutral or even +ve to avoid this issue then the offset really works productively so that the positive monthly cashflow is saving 6% interest on the SMSF loan rather than 0.01% in a business account. The accumulated cash can be invested later.

 

Paul - as usual a doomsday scenario for yourself. Not sure what sort of properties you are seeing to arrive at this conclusion however, we see completely the opposite - you have your opinion and I have mine. A LRBA is a fantastic strategy with yes a strategy, Many and I mean many properties all over Australia do not produce this result. Many "survive" on the rental income and contributions are used to bump up your cash buffer. With offset, that buffer is used to reduce loan interest and improve the overall scenario. With an effective plan, no issue with offset and 80%, as long as you donot burn your buffer and choose the right property. If not by all means lower your LVR - you pay the same application and legal fees for the loan.

Once more, positive gross and net cash flow is realistic and possible.

Cheers Ivan

 

It would also depend on how much money is in the offset too. A $100k buffer would mean about a $6k savings in interest per year. employer contributions would be received as well and not to mention negative gearing benefits due to non cash deductions.

 

Yes Terry - my point is to say a 80% LVR loan in SMSF is a poor financial plan and alarmist at best. I strongly disagree.

I'm way to passionate about this stuff and as you know see hundreds of success stories with SMSF borrowing, yes, people make poor decisions on a property (hello park trent) - however - due diligence and patience makes a great decision...better than shares hey.

The offset is a benefit, it can work without offset. I do it - so do many others.

Cheers Ivan

 

Is that the balance in the cash account, or total value in smsf?

 

As a heads up for all SMSF investors out there, Big Sky - which is a lender I have done a lot of business with of late is reducing their LVR to 75% as of Monday. We are really running out of lenders with 80% who service inside the SMSF only. Further their SMSF interest rate is now 5.83% an increase of 20 basis points. Assessments rates are high on the remaining lenders and OTP is becoming a no-go....

As a side note, this is due to the influx of brokers joining them as a result of St George/ BOM reducing LVR to 70% around 6 months ago and AMP exiting and reentering the market. The feeling that 70% will be the ceiling is becoming reality.

Anyone purchasing off the plan - lets hope you consult someone for credit advice to ensure you can get a loan come settlement.

Cheers and happy investing.

Ivan

 

What would be the borrowing constraints off the plan?

 

The obvious one is that you may have made your purchase based on 80% LVR, and will be faced with 70% LVR at settlement...

 

Many - it used to be common for lenders to do 80% off the plan - now there are a couple of lenders that will do it, however they have major constraints. As mentioned above there is the 10% liquidity at settlement, which even if you do you budgeting, can come crashing down if an independent valuer provides a valuation less than purchase price. This is common in 'oversupply' suburbs like CBD Brissy and South Yarra here in VIC. Even if the value comes in credit may limit LVR if there is a comment around oversupply.

Further, Macquarie has a minimum balance of $200k and tough servicing. Its not impossible however, becomes difficult to service. You can look at Liberty - even their model has constraints.

If you are purchasing off the plan, I would be budgeting at a maximum 70% LVR with scenarios of valuation issues and of course a healthy contribution strategy to bump up your balance during the build. If everything comes crashing down (worse case scenario) you can do a related party loan. This was considered when we though borrowing could be banned, but it won't so all good.

Hope that helps

Cheers Ivan

 

2 questions Ivan. Does the offset account sit within the fund meaning only liquidity or contributions to/In the SMSF can be used in the offset account or can the offset sit outside the SMSF so everyday money can sit in this?

What is a related party loan and how does this work?

Cheers for your help

 

Offset accounts must be in the name of the borrower.