SMSF property purchase - Home loan

Hello,

I’m looking to purchase a residential property inner city Melbourne via a joint SMSF.

Does anyone have any recommendations for a an SMSF Home Loan provider.

Also how do you ascertain borrowing capacity please ?

Thanks

 

What is a joint smsf?

Not many lenders left now. Assessed on members income plus the funds income.

 

You need to speak to the bank or a broker to run the numbers for you and run through a number of caveats that are associated with SMSF lending such as liquidity tests, etc.

Servicing is very hard to achieve in SMSF lending so this very important to do ASAP.

You also need to ensure that the property is acceptable lending for the SMSF.

When it comes to SMSF lending one of the things I would look at is the lender's fixed rates - due to the lack of competition in this space you need a lender that has sharp fixed rates if you need to fix the loan.

 

With the reduced lenders in this space and the issues it can be high cost for the loan product. Dont even attempt to compare rates etc to conventional loans. Fees incl trust and legals etc can be high. A experienced broker like Shahin can also guide all the pitfalls and hurdles like liquidity margins, what will be allowed as income to service the loan, LVR etc. Targeting a high LVR lender is nothing like normal investment lending and may be a sign of liquidity and servicing issues.

Many people complain of loan rate creep with SMSF loans. Lenders blame risk but a lack of competition and costly back office capital requirements do make this form of lending a high cost one. All the major lenders have pulled out for this reason.

 

Factor in about $5k to $7k in extra costs for SMSF based lending.

 

Which lender is that?

Across the board

App fee $995
Legals $1500
Val $330

Thats la trobe and a few others very similar.

Serving ain't that bad in smsf land however if its off the plan, thats where you need to be careful and if outside metro - check beforehand for rates based on post code.

All the best

Cheers Ivan

 

Rough numbers from a purchase with LaTrobe
App fee $995
Val $330
Legals $2100
LaTrobe Settlement Lawyer - $1100 (Not sure why I got slugged with this)
Independent legal advice - $500
A few hundred dollars of other fees so all up about $5k+ more than personal lending

Plus extra costs for a bare trust and trustee.

 

You have probably settled but

Legals $2100
LaTrobe Settlement Lawyer - $1100 (Not sure why I got slugged with this)
Independent legal advice - $500

The legals of $2100 should be capped at $1500, I know one panel lawyer casually charges more (when they shouldn't). The settlement lawyer fee should not be there as that is part of the legals of $1500. You will have a conveyancer which will be around $1000 to $1500. The legal advice can be cheaper, if you shop around.

The bare trust is additional as you mentioned.

Hope your purchase worked out well. Remember if you discharge the mortgage with La Trobe within 5 years you have a 3 month interest payment penalty which surprises many.

Cheers Ivan

 

If its a apartment its also worth checking with a solicitor prior to signing whether the way title is structured will complicate matters. Often a carpark + apartment have separate reg titles but are bound together (stapled assets) and cant be separate assets as defined by super law. But some are capable of being individually traded and these may fall foul of a simple SMSF loan and its required structure. The bare trust can only hold a individual asset and not a set of assets with different rights etc. You want the unit + carparks to be treated as if they are one asset. The ATO consider "stapled titles" to be one asset. If the carparks were capable of being traded etc it could get costly to settle acquisition of three assets as an example.

Reference SMSFR 2012/1

 

There were many last minute delays but it all went well. The purchase is high yielding and is going well.

The extra fees for the settlement, LaTrobe gave me some excuse about purchase being in WA and having to use a local settlement agent. I should have pushed for a better answer but I was too busy at that time and there were enough delays already with a tight settlement.

Yeah, the 3-month break-free was a bit of surprise and I didn't know until I signed the loan docs but kept it in my mind for when I get itchy to refinance.

 

Refinance options for SMSF loans are nothing like for consumer loans. Very expensive fees and a limited panel of lenders (some lenders wont do refinance and if they do watch the fees) typically mean its a trap and when the fringe lenders wish they will ratchet up the rate citing costs of funding - Or not drop the rate when OO / Investor rates fall. This is quite common since all the majors incl STG, AMP etc dropped out.

Many lenders will want specific settlement agents and it was common when the major banks were lending that they often required the law firm giving the sign off to also settle it.

 

This is generally not an issue anymore - given a high percentage of apartments are purchased by SMSF (and our chinese friends), the developers are aware of the requirement and is usually dealt with on the plan of sub. The older apartments or units with a car space - still still is an issue.

Cheers Ivan

 

I think that explains it. So the lenders settlement lawyer just charged for not doing much while my settlement lawyer did the actual work.

Fully agree on the refinance costs and potential traps. Fixed rate products aren't really available with all lenders either. Aggressively paying down debt and keeping the option of related party LRBA open seems to be the way to go.

 

What happens if the related party dies and the executor demands repayment ? What does the loan agreement provide for ?

The shorter term of the related party refinance must be a matter to consider vs the more favourable rate. Refinancing from a bank 25 year term to a (max) 15 year term for related parties has a major cashflow impact and may itself result in a non-arms length concern and an investment strategy problem. My quick calcs suggest a 60% increase in repayments v a less favourable arms length lender rate that is 1% (approx) higher. Where the loan has already been financed say for three years the related party refinance term is reduced further by that and repayments would be even higher over the residual 12 years more than doubling repayments

For loans that are presently above 70% LVR a immediate reduction may also be required.

Aggressively paying down debt is a good strategy while a LVR is above 70%. SMSF refinance using related parties can have some major debt traps that can leave the property sale as more financially viable.

Source PCG 2016/5