SMSF Loans: Everything You Need to Know For Property Investment, Home Loans & Related Parties Etc.

  • Troy BurnsTroy Burns
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

If you’re like most people, the words “self-managed super fund loans” probably make your eyes glaze over. But if you have an SMSF or are thinking about setting one up, it’s important to understand how they work – especially when it comes to taking out a loan. In this article, we’ll explain everything you need to know about loans within an SMSF.

What is an SMSF loan?

Specifically designed for those who have self-managed superannuation funds. This type of loan can be used for various purposes, including investment in residential property, shares or other assets.

One of the key benefits is that it can be used to borrow money to invest in assets that are not able to be purchased using your regular APRA-regulated superannuation fund. This means that you can use your SMSF to build up a more diverse portfolio, which can lead to greater potential returns.

Another benefit is that it can be used to purchase high-value assets such as property or shares. This can have tax advantages, as the interest on the loan is tax-deductible.

How do SMSF loans work?

Loans within an SMSF work in much the same way as any other type of loan – you borrow money from a lender and then make regular repayments plus interest until the loan is paid off. However, there are a few key differences that you need to be aware of:

  1. Collateral: one of the biggest differences between a loan in an SMSF and a regular loan is that you’ll need to put up some form of collateral. This is because they are usually considered to be higher risk than other types of loans, so lenders want to make sure they’re protected in case you default on the loan. The most common form of collateral for an SMSF loan is property, but it can also include shares, managed funds, or other investments.
  2. Loan terms: Another difference between is that the terms are often shorter. This is because the assets that are purchased (e.g. investment property) are usually longer-term investments, so the loan doesn’t need to be paid back as quickly.
  3. Lender’s mortgage insurance: If you’re borrowing more than 80% of the purchase price of the asset, you’ll also need to pay for lender’s mortgage insurance (LMI). This is an insurance policy that protects the lender in case you default on the loan.
  4. Interest rate: Because they are considered to be higher risk, the interest rates are often higher than other types of loans. However, it’s important to compare interest rates across different lenders to make sure you’re getting the best deal.
  5. Fees and charges: Another downside is that the fees can be higher than other types of loans. This is because there are often additional costs associated with setting up and maintaining a self-managed super fund.

SMSF Loan Recourse

There are a few key differences to be aware of when it comes to recourse on a self-managed super fund loan compared to a standard home loan. Here’s what you need to know.

When you take out a home loan, the bank can typically pursue you for the full amount of the loan if you default. This is known as ‘full recourse’. However, the lender’s options are more limited with a loan within an SMSF. This is because the SMSF itself is usually the borrower rather than the individual members. As such, the lender can usually only pursue the SMSF’s assets for repayment. This means that if the house is the only asset in the SMSF, then the lender would only be able to go after that.

The other key difference is that they are typically non-recourse loans. This means that the lender cannot personally pursue the SMSF members for repayment. So, if you’re considering taking out a loan within your SMSF, be sure to understand the difference between full recourse and non-recourse loans. And always speak to a qualified financial advisor to get the best advice for your individual circumstances.

What is a Bare Trust?

There are several reasons why you might need to set up a bare trust for your SMSF. A bare trust can help ensure that your SMSF assets are properly protected. Without a trust in place, your SMSF assets could be at risk if you were to die or become incapacitated.

A bare trust can also help you manage your SMSF tax affairs more efficiently. By holding assets in a trust, you can distribute income and capital gains more effectively to beneficiaries who are in lower tax brackets. This can help minimize the overall tax liability of your SMSF.

They can provide greater flexibility when it comes to estate planning. For example, if you have young children, you can use a bare trust to ensure that they don’t inherit your SMSF assets until they reach a certain age.

Bare Trust for SMSF Property Investment

A bare trust for SMSFs is a type of trust that allows the trustee to hold assets on behalf of the beneficiaries. The trustee has complete control over the assets in the trust and can use them for any purpose they see fit. The beneficiaries have no say in how the assets are used and do not have any ownership rights over them.

Bare trusts are often used to hold property or other valuable assets such as shares, bonds or cash. They can be used for both personal and commercial purposes. For example, a bare trust could be set up to hold an investment property.

Bare trusts are simple to set up and administer, making them a popular choice for SMSF trustees. Trustees can choose to set up a bare trust at any time, and there is no minimum amount of money required to do so.

Once the assets are transferred into the trust, the trustee has complete control over them. The trustee can use the assets for any purpose they see fit and can sell or dispose of them at any time. The beneficiaries have no say in how the assets are used and do not have any ownership rights over them.

SMSF residential property home loans

Property purchased with an SMSF home loan must be used solely as an investment property and cannot be used as the fund’s members’ primary residence. All transactions related to SMSF lending must be conducted at arm’s length. This means that trustees cannot borrow from or lend to any members of the fund or purchase a property from a close relative. All transactions must be made at market value to avoid potential conflict of interest.

Trustees must ensure that they do not use their loaned funds to purchase a property that is already owned by a member of the fund. This would be considered a prohibited transaction and could result in severe penalties from the ATO. Also, remember that they are responsible for all repayments on an SMSF home loan. The trustees may be personally liable for the debt if the fund cannot make monthly repayments.

Structural Changes to the Property

If you’re considering a loan within your SMSF, it’s important to understand that there are some key differences compared to a standard home loan. One of the key restrictions is that you cannot make any structural changes to the property without prior approval from the lender.

This means that if you’re planning on renovations or making any other changes that could affect the value of the property, you’ll need to get a sign-off from your lender before proceeding. Failure to do so could result in your loan being classified as non-conforming, leading to higher interest rates and other penalties.

Loans within an SMSF for commercial investment property

Commercial real estate loans for SMSFs have become increasingly popular recently as investors seek to diversify their portfolios and take advantage of the potential tax benefits. There are several factors to consider before taking out a loan, including the type of property you wish to purchase, the loan amount and repayment terms, and your overall investment strategy.

Some important things to keep in mind when considering an SMSF loan for a commercial investment property include:

  1. The purpose of the loan must be for the sole purpose of acquiring an investment asset – it cannot be used for personal use or any other purpose.
  2. The property must be income-producing, such as a commercial office or retail space. It cannot be used as your primary place of residence.
  3. You will need to have a strong business case for the purchase, including a detailed feasibility study and pro forma financials.
  4. The loan must be structured so that the SMSF is the beneficial owner of the property – this means that the title must be in the name of the SMSF trustee(s).
  5. You will need to ensure that the property is insured against damage or loss and liability risks.

If you are considering taking out an SMSF loan for commercial property investment, it is important to seek professional advice to ensure that it is the right decision for your specific circumstances.

Bare Trust Setup

A bare trust can be used for many purposes, including holding assets on behalf of an SMSF or investments for an estate’s beneficiaries.

There are a few key things to keep in mind when setting up a bare trust:

  • The trustee must be a natural person (i.e. an individual, not a company)
  • The trustee must be 18 years or older
  • The trustee must be an Australian resident
  • The trustee must have a valid tax file number

The trustee can be the SMSF or an individual member of the SMSF. If the trustee is an individual, they must provide their personal details when setting up the trust.

Once the trust is set up, the trustees will need to sign a deed of trust which outlines the terms of the trust. The deed should be kept on file in case it needs to be referred to in future.

The assets held in the trust must be clearly identified and segregated from other assets owned by the SMSF. This means that if the SMSF sells any of the assets held in the trust, the proceeds must be paid into the trust account and not mixed with other funds held by the SMSF.

The trustee is responsible for managing the assets held in the trust and ensuring that they are used in accordance with the terms of the trust deed. The trustee will also need to prepare financial statements for the trust on an annual basis.

The Bank of Mum and Dad

Parents can loan money to their children’s self-managed super funds (SMSFs) to help top up their retirement savings.

There are a few things to consider before taking out an SMSF loan from your parents. For starters, you’ll need to make sure that the loan is at an arm’s length rate – which means the interest rate must be equal to or greater than the market rate.

You’ll also need to make sure that the loan is repaid within a reasonable time frame and that any collateral used to secure the loan is of a similar value to the loan amount.

If you’re considering taking out an SMSF loan from your parents, it’s important to speak to a financial advisor first. They can help you work out if it’s the right decision for you and your family.

Where can I find the best SMSF home loan rates?

If you’re looking for the best SMSF home loan rates, there are a few things you need to keep in mind. First of all, it’s important to remember that SMSF loan rates can vary depending on the lender and the type of loan you’re looking for.

That being said, there are a few general tips that can help you find the best SMSF loan rates. One of the best places to start your search is by talking to your financial advisor. They’ll be able to provide you with some insight into which lenders offer the best rates.

Another great resource for finding SMSF loan rates is online comparison sites. These websites allow you to compare rates from a variety of different lenders, which can make it easier to find the best deal.

Finally, it’s also a good idea to talk to your accountant or tax agent. They may be able to provide you with some additional information about SMSF loan rates and how they can impact your tax situation.

By following these tips, you should be able to find the best SMSF loan rates for your needs. Remember, however, that it’s important to shop around and compare rates from multiple lenders before deciding. This will help you ensure that you’re getting the best possible deal on your loan.

What are SMSF loans to related parties?

Loans to related parties are a type of loan that can be used to help fund the purchase of assets within a self-managed super fund (SMSF). The loan is made between the SMSF and a related party of the SMSF, such as a family member or close friend.

There are a few things to be aware of with loans to related parties.

  1. The loan must be on commercial terms – this means that it must be at an arms-length distance, and the interest rate must be at the market rate.
  2. The amount borrowed by the SMSF from all related parties cannot exceed 5% of the value of the fund’s assets.
  3. The asset purchased with the loan must be held by the SMSF for at least 12 months.

If you’re considering using an SMSF loan to related parties to help fund your SMSF, it’s important to seek professional financial advice first. This will ensure that you understand all of the risks and benefits involved and that the loan is structured in the best way for your SMSF.

Do I need an SMSF-related party loan agreement?

If you’re thinking of lending money to or borrowing money from a related party through your SMSF, you’ll need to enter into a formal loan agreement. This ensures that the transaction complies with the strict rules governing SMSFs and related party transactions.

Under the super laws, a ‘related party’ includes:

  • any member of the fund or their spouse or child
  • any employer of any member of the fund
  • any trustee or director of the corporate trustee of the fund
  • any person who controls, or is controlled by, the fund or trustee
  • anyone who provides substantial services to the fund or trustee.

The loan agreement must set out certain key terms and conditions, including:

  • the amount of money to be borrowed
  • the interest rate that will be charged on the loan
  • the term of the loan
  • any collateral that has been provided as security for the loan.

The agreement must also specify that:

  • the loan is made on a commercial basis and at arm’s length (in other words, it’s not a sweetheart deal)
  • the fund has received independent advice from a qualified professional about whether the loan is in the best interests of the fund. This is to ensure that members are not disadvantaged by the transaction.

If you’re considering entering into an SMSF-related party loan agreement, seek professional advice first to ensure you understand your obligations.

How much can my SMSF borrow?

For starters, your SMSF must be compliant with the SIS Act before it can borrow money. This means that the fund must have a trust deed that specifically permits borrowing, and the trustees must have received professional advice about the risks and benefits of borrowing.

Once these requirements are met, your SMSF can borrow up to 80% of the property’s value. The loan must be secured against the property itself and not against any other assets of the SMSF.

It’s important to remember that when you borrow money through your SMSF, you are personally responsible for repaying the loan. This means that if your SMSF defaults on the loan, you will be liable for the outstanding amount.

If you’re thinking of using your SMSF to purchase a property, seek professional advice first to understand all the risks and benefits involved.

General Advice Warning

Troy Burns

Non-Correlated Capital

Troy has more than 15 years investment and fund management experience, including management of hedge funds and multi-strategy funds. Troy has raised and managed over 300 million dollars in investments and has engaged and serviced over 150 high-net-worth clients for Non-Correlated Capital, the investment company which he serves as CEO and Portfolio Manager. Based out of Perth, Western Australia, Troy is one of the founders of SMSF Mate.

Troy’s educational qualifications include a Masters of Business Administration, Masters of Applied Finance, and Advanced Diploma, Financial Markets, completed at Charles Sturt University. Troy has also previously worked as a derivatives trader and the managing director of a civil engineering company.

You can find out more about Troy or connect with him on Linkedin here:

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  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
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    Tim B, Business Owner, SMSF Trustee