How does a bank SMSF loan work?
Refer to the diagram as you read through the steps to buying a property with your SMSF.
1. You and other members establish a Self Managed Super Fund, in this case called ‘SMSF’. You and other members instruct your previous fund to transfer the balance to your SMSF bank account.
2. You will also need to establish a ‘Security Trust’, also know as a ‘Bare Trust’. Technically speaking, a ‘Security Trust’ or ‘Bare Trust’ is a special type of trust whereby a trustee holds an asset for the absolute benefit of the beneficiary. This basically means that a special entity is established to hold the property on trust for the Self Managed Super Fund. The SMSF is the only beneficiary of the trust and is the only entity that can benefit from the property.
3. You (the SMSF) locate a property you wish to purchase.
4. You talk to Prowealth Money to find out how each bank handles the mortgage process and apply for a loan in the name of ‘SMSF Trustee as Trustee for the SMSF’.
5. The bank requires a Security Trustee to hold the property while a loan is in place, in this case ‘Security Trustee Pty Ltd As Trustee for the Security Trust’. This name must appear on the Contract for Sale. The SMSF can now pay the deposit from its bank account to the vendor’s solicitor along with purchase costs such as stamp duty etc.
6. The loan is settled, rent is now received by the SMSF, and it makes repayments to the bank in the ordinary way.
Features of a SMSF loan
There are a limited number of lenders to choose from when deciding to purchase a property with a SMSF. Generally all SMSF loans have these basic features in common:
•You can choose virtually any kind of property including residential, commercial, retail, and holiday units subject to bank approval.
• The lender has no recourse to the other assets of the SMSF, providing the SMSF with absolute protection for its other investments. This means that should the SMSF default on the loan, the bank cannot get access to any of the SMSF’s cash, shares or other property to repay the debt. This represents strong asset protection for the fund and its members.
•SMSFs can deal with the property however and whenever they like, in the same way as investors can deal with “normal” investment properties for example, lease, renovate, repair, or sell.
• All rents are paid direct to the SMSF. Loan repayments are made in the ordinary way from the SMSF bank account.
•The SMSF can pay out or reduce the mortgage at any time, subject to the terms of the relevant loan.
Essentially, new SMSF loans falls within existing credit policies and procedures for most banks. An important feature of these loans is that individuals (the SMSF members) are allowed to find their own properties. This is an important point as it differentiates bank SMSF loans from many other advisor products that are sometimes linked with developers to sell residual stock (which may be overvalued) using traditional installment warrants. Thus the decision to invest is entirely that of the SMSF. Like all bank loans, all properties are required to be independently valued by 3rd party valuers ensuring you are paying fair market value.