Self Managed Super Fund – Borrowing To Buy Property

By FutureNestEgg | September 21, 2009

In September 2007 big changes were made to Superannuation tax laws as a result of which self managed super funds (DIY Super Funds) can now borrow to invest in property. Up until then there was a complete ban on super funds borrowing to invest in shares and property. So these changes are quite significant and will have a positive impact on self managed super funds.

As with almost anything super, implementing this borrowing is not straightforward and you will definitely need to seek the help of a professional.

In this post, I will take you through some of the main points that you should be aware of (regarding this):

1. You have to borrow through instalment warrants – wondering what it is – think Telstra Shares – investor makes an initial part payment and then makes the remaining amount plus costs in installments.

2. The vendor you buy the property from has to be arm’s length – meaning no relation and no vested interest.

3. The lender has no recourse to other assets – meaning if you (your self managed super fund) default, then the lender has the right to take hold of the property – but ONLY that property – he cannot touch any other assets in your super fund.

4. If you are wondering all the above points seem to be too much of hassle, then here is the good news – banks are now offering specially packaged loans for this very purpose – all the requirements are structured within the loan and you don’t have to worry if it is instalment warrant or non-recourse etc.

5. The loan terms of these loans will not be as long as your regular mortgages.

6. The banks usually lend between 60 to 70% of the property value being purchased – not the usual 90%.

7. There are some pretty good tax advantages – all expenses related to property (interest, depreciation etc) are all tax deductible. The property earnings are taxed at 15% (if you owned the property, earnings taxed at your marginal rate). When you retire, no capital gains tax and no tax on earnings.

8. Another obvious advantage is the leverage – if you couldn’t borrow then your probably wouldn’t be able to buy that property – buy borrowing, you are increasing the amount of money at the super fund’s disposal.

9. It is all within your super fund – rents paid into the super fund, loan payments made from super fund. You cannot occupy the property. The trustee buys the property on the behalf of your super fund.

If you run a self managed super fund, then definitely worth looking into – but there are lot more details involved and I have barely touched the surface.

Do you have experience in borrowing for your super fund – Please share your comments and opinions below.

Best,