Compare Self-Managed Super Fund Loans from 6.99%

Who provides loans for an SMSF?

Many of the most popular providers for SMSF loans are non-bank lenders. A lot of major banks no longer offer SMSF loans, which has allowed these smaller lenders to take market share. Some providers include:

• Bank of Queensland
• Firstmac
• Freedom Lend
• Homestar Finance
• La Trobe
• Liberty
• Loans.com.au
• Mortgage House
• Switzer Home Loan
• WLTH
• Yard

How does an SMSF loan work?

To understand how an SMSF loan works, it’s useful to look at the major components of one:

1. Commercial or residential property

One of the biggest decisions you’ll have to make is if you want to invest in commercial or residential property, and pick the right loan. Loans are typically meant for one or the other. With commercial property loans, you can usually borrow more, such is the nature of commercial property. However you might need a lower loan-to-value ratio (LVR), explained further below.

Until semi-recently, SMSF loans typically only catered for commercial property, however loans for residential purposes have become more popular.

2. Interest rates

Interest rates on SMSF loans are typically higher than what you’d associate with regular home loans. This is because of the limited recourse as mentioned earlier. This means there is a slightly higher risk for the lender to loan money to borrowers.

When an SMSF is borrowing from a related party, the ATO specifies the interest rate to charge. As of the 2022-23 financial year, the ATO has set this rate at 5.35% p.a. for the purchase of real property. This rate is what the ATO considers to be a market-competitive rate. While it’s possible to find rates cheaper than this when borrowing through a lender (an unrelated party), this could be indicative of what you could expect to pay in interest.

3. Fixed or variable-rate terms

Many SMSF loans typically have variable interest rates, however some fixed options are available. Like with home loans, variable loans generally provide more flexibility and if interest rates fall, so too does the loan rate. However, the opposite is true, too. Fixed-rate borrowing provides repayment certainty, however they are typically more restrictive as to the maximum level of repayments allowed. They also come with break fees if you refinance or discharge the loan before the fixed period is over.

4. Loan-to-value ratio

Loan-to-value ratios or LVRs with many SMSF loans are typically restricted to 80%. This means you must have a 20% deposit ready. Some lenders might require lower LVR i.e. a bigger deposit, especially when it comes to borrowing for commercial property.

5. SMSF loan fees

Fees on SMSF loans could add up to hundreds of dollars before you’ve even purchased a property. Typical fees include establishment fees, monthly or annual fees, settlement fees and more. Like with a regular home loan, an indication of the fees can be seen in the comparison rate – a higher comparison rate could indicate more fees.

6. LRBA reporting requirements

Funds that are using an LRBA or SMSF loan must work out and include a member’s share of the outstanding balance of the loan at 30 June each income year. If there are four members, you could divide the balance by four. More details can be found on the ATO website here.

SMSF loan pros

1. Leverage and opportunity cost

Like with a regular home loan, your deposit to secure an SMSF loan means you could purchase a property potentially worth millions. This saves having to use SMSF cash funds to purchase a property, which may not be enough. If you have the cash, a loan also frees up that cash to be put towards other investments, potentially yielding higher returns.

2. Assets

You usually have the choice of purchasing either residential or commercial property. Commercial property comes with the benefit of usually having long-term stable tenants with a high rental yield, and properties worth millions.

3. Flexibility and repairs

Borrowed funds can typically be used to repair existing fixtures in a home owned by the SMSF. However you’ll have to be careful – the ATO can penalise fund members and trustees for making improvements such as a shiny new bathroom rather than necessary repairs such as a leaking roof.

SMSF loan cons

1. Fees

Fees on SMSF loans can be high, often costing hundreds or potentially thousands of dollars over the life of the loan. This adds to the costs of self-managing super in general, which might not be cost effective until your balance is high.

2. SMSF restrictions and penalties

One of the overarching policies of self-managing super is the ‘at arm’s length’ test. For property this means you can’t lease to anyone related to you or other fund members, or give anyone a special rental price – they must be market rates. Regular audits means the ATO could penalise you if you’re in breach of this, which could cost thousands. Penalties must be paid by funds outside of the SMSF.

3. Turnaround times

Due to the nature of SMSFs there’s an additional layer of complexity should you wish to apply, refinance, or discharge your SMSF loan. Many SMSF loans’ application processes take longer than regular home loans, and settlement could take many weeks – not days. This makes it even more important to have all your paperwork and financial information ready for the lender. This can be made easier by having an accountant or SMSF specialist handle the paperwork for you, but this comes at an added cost.