Property finance for self-managed super funds
When a self-managed super fund borrows to buy property, it does so through a limited recourse borrowing arrangement. The property is commonly held in a separate holding trust, often called a bare trust, and the lender’s recourse is limited to that one asset rather than the rest of the fund.
Oakwood arranges this lending through the lenders that offer it. Whether borrowing suits your fund is a question for your financial adviser and accountant; our role is to arrange the finance.
Where Oakwood fits
An SMSF purchase involves more professionals than a standard property loan, and each has a defined role. Your accountant and financial adviser advise on whether the fund should borrow and how the property fits its investment strategy. A lawyer prepares the holding trust deed and advises on sequencing and duty. The fund’s auditor reviews the arrangement after the event. Oakwood arranges the credit.
In practice that means:
- Lender selection. Fewer lenders offer SMSF loans than standard home loans, and their requirements differ. We compare suitable options from our lending partners against the fund’s requirements, including the property type and the structure your advisers have settled on.
- Application. We prepare and lodge the application and coordinate the documents the lender asks for, typically including the fund’s trust deed, financial statements and evidence of contributions and rent.
- Coordination. We work alongside your accountant, lawyer and adviser so that the lender’s requirements and the fund’s paperwork line up, and we keep you informed between lodgement and settlement.
The lending decision remains the lender’s, subject to its assessment of the fund. If you are weighing up a purchase inside your fund, speak to our team.
Typical lender requirements for SMSF loans
SMSF loans are assessed differently from a personal property purchase, and requirements vary between lenders. The following are common examples rather than fixed rules.
- Holding trust. Lenders generally require the property to be held in a separate holding trust, often called a bare trust, with the fund as beneficial owner. Many want to review the holding trust deed and the fund’s own deed as part of their assessment.
- Deposit. Lenders commonly expect a larger deposit than for a standard home loan, and generally lend a smaller proportion of value on commercial property than on residential.
- Fund liquidity. Many lenders look for a cash or liquid asset buffer left in the fund after settlement, so repayments, insurance and expenses can be met if rent or contributions pause.
- Serviceability. Lenders generally assess the fund’s income, typically member contributions and rent from the property, rather than your personal salary.
- Acceptable property. Lenders commonly accept standard residential property and established commercial property such as offices, warehouses and retail premises. Vacant land, construction and specialised assets are often excluded.
Residential or commercial. Residential property in a fund is commonly let to tenants unrelated to the members. Commercial property can, in many cases, be leased to a member’s own business as its premises, which is one reason business owners look at this structure. Your accountant and financial adviser can confirm what your fund may do and whether either suits it.
Borrowing inside your super fund
A fund cannot simply take out a mortgage. It borrows through a limited recourse borrowing arrangement, and nearly every feature that makes these loans different exists to protect the rest of the fund if the property goes wrong.
How the structure works
The property is held in a separate holding trust, usually called a bare trust, with the fund holding the beneficial interest. The lender’s recourse is limited to that single asset: if the loan defaults, the lender cannot pursue the fund’s other investments. That protection is the whole point of the structure, and the reason the paperwork is heavier than a normal purchase.
The arrangement covers a single asset, and lenders will not generally fund improvements to it while the borrowing is in place. Repairs and maintenance are commonly treated differently from works that change the property’s character, such as subdividing, adding a dwelling or a substantial renovation. What the fund may and may not do with the property is a question for its accountant and lawyer, and it is worth asking before you start looking.
What lenders commonly require
A larger deposit than a personal purchase: many SMSF lenders lend to around 70 to 80 per cent of value for residential property and less for commercial. Rates commonly sit above standard home loan rates, and the pool of lenders offering these loans is smaller than it once was.
Lenders also commonly want a liquidity buffer left in the fund after settlement, for example 5 to 10 per cent of the property value in cash or liquid assets, so the fund can meet repayments, insurance and expenses if rent or contributions stop. Serviceability is generally assessed on the fund’s income, contributions plus rent, rather than on your personal salary.
Get the order right
The holding trust deed and the purchase contract are commonly executed in a particular sequence, and in some states the wrong order can have duty consequences. The fund’s lawyer is the person to confirm the sequence before anything is signed. Your accountant and the fund’s auditor should be across the structure, and many lenders require evidence that the fund has received independent legal and financial advice.
We arrange the lending. Whether borrowing inside super suits your retirement strategy is a question for a licensed financial adviser, and we will say so plainly rather than drift into it.
How we have structured it
A representative file of a kind we see often. Details are illustrative and de-identified, and outcomes vary from fund to fund and depend on lender assessment.
Scenario: residential purchase inside a fund
- Purpose: buying an investment property in super without stripping the fund’s cash
- Funding: around $625,000
- Structure: limited recourse, 70 per cent of value
- Timeframe: eight weeks
The situation. Two members in their late forties wanted their fund to hold a residential investment property rather than add to an equities position they already considered heavy.
The complication. At 70 per cent lending the fund needed a substantial deposit plus costs, and the lender also required a liquidity buffer retained afterwards. On the first pass the numbers left the fund uncomfortably thin. The members had also assumed they could renovate after settlement, which their advisers confirmed the structure did not permit while the borrowing was in place.
What we did. Worked with the members and their accountant on a lower purchase price target so the buffer stayed intact, and had the fund’s contribution capacity confirmed by the accountant so that serviceability was evidenced rather than asserted. Flagged the improvement question early so the members raised it with their advisers before a property was chosen, which changed what they looked at.
The outcome. The lender funded the purchase at around $625,000, with the liquidity buffer intact and the holding trust executed in the sequence the lawyer advised. No duty surprise, and no renovation plan that would have breached the arrangement.
Before you commit the fund
If you would like our SMSF property guide, ask our team for a copy, or talk through the lending side of what you have in mind. You can also see how we approach investment lending and commercial finance outside super.