I’ve spent the past week presenting at professional development days for National Mortgage Brokers (NMB) on the topic of SMSF borrowing. As part of these PD days I’ve had the opportunity to hear from many of the major financial institutions about their SMSF loan products.
What resonated most with me hearing from the banks is the differences of each lender with their SMSF loan products.
When thinking about undertaking a SMSF loan through one of the banks, credit unions, building societies or other lenders, consider some of these important items below:
- Trustee Structure is paramount – the difference between a corporate vs individual trustee can determine a large range of variables with SMSF loans. These include things from the Loan-to-Value (LVR) ratio to the deal actually going ahead. Some banks will not provide a loan unless a corporate trustee is in place; some will discount their LVR based on a fund having individual trustees. It is important you understand these issues up front to ensure that the trustee structure is right the first time!!
- Bundled vs Unbundled packages – most banks will require trustees to obtain all the documentation, including SMSF trust deed, trustee structures and bare trust documentation. However, CBA by comparison provide trustees with a ‘pre-packaged’ solution whereby they will bundle and manage the custodian arrangement for the super fund (currently at $45 p/mth). Where the trustees arrange for all documents, the bank’s internal or external lawyers will review these documents with a fine-tooth comb (and charge accordingly). Trustees need to consider weighing up an upfront once-off cost to establish the bare trust, against an ongoing fee for setup and ongoing management of the borrowing.
- Loan Servicing varies – Banks all have different requirements to look at the serviceability of the loan; some will include employer contributions for interest coverage, some won’t. You need to understand not only the interest coverage required (e.g. 125%), but how the bank is going to assess the income and contributions of the fund (in particular the patterns of contributions being made).
- Varying Loan Amounts - the entry point for many of these loan types can start from as little as $50,000, with most major lenders looking at minimum loans closer to the $200k mark. There is further distinction between residential, commercial and rural. Maximum loan amounts also vary. Some banks will also allow for offset accounts, which may be advantageous for trustees to save on interest.
- Pricing is mainstream – the good news is that interest rates on SMSF loan products is very much in the mainstream lending category. Interest-only periods of 5 or more years are also available, which allow for further flexibility in tax planning for the fund (in particular for concessional contributions being paid into the fund).
- Sydney – Tuesday, 24th May – Dockside, Cockle Bay Wharf, Darling Harbour
- Melbourne – Thursday, 26th May – Laureate Room, Etihad Stadium, Docklands