Aussies are more engaged with their superannuation than ever before and we have good reason to be.
Big events like the GFC saw fortunes wiped from our retirement savings; while periods of low-interest rates and several property booms in different markets over the past decade showed that we may need to do more than just let some faceless fund managers direct our super to wherever they see fit.
More people want to take charge of their future and shore up their retirement by investing in the nation’s favourite asset class…property.
To use your superannuation the way you want to, you need to establish a self-managed superannuation fund (SMSF).
Once you do, there are a whole lot of rules and factors about borrowing within that fund that you need to know.
How does it work?
The introduction of compulsory super back in the ‘90s means that everyone who has worked since should have some money in their nest egg. Once you move that money into an SMSF, you can use a portion of it as a deposit to invest in property.
Some people may have enough in their super to buy an investment property outright. If you need to borrow within your super, the loan will be secured against the property you purchase, and your SMSF is responsible for making repayments.
Your SMSF must have been established for two years before it can borrow to invest. It also needs a balance of at least $50,000 (though most banks prefer lending to funds with a balance of more than $200,000), a sound investment strategy as deemed by an auditor and the financial capacity to make repayments.
SMSFs can have up to four members, or ‘trustees’. All must be aged 18 or older and will have personal risk against the loan, even though it is the ‘fund’ that is the ‘investor’.
Lenders may require minimum 20% deposit for residential securities and larger deposit for commercial securities. Some lenders may require liquidity ratio between 5% to 10% of the total loan balance (existing and new loans).
Borrowing power
If you use an SMSF to borrow, your personal borrowing power outside of super will not be affected.
Speaking of which, the whole thing needs to be conducted under superannuation rules. So, you must be able to cover the repayments with the employer contribution under Superannuation Guarantee Charge (SGC) currently 11% of your salary (and other fund members’ salaries) and rental income from your SMSF properties. It will be easier to meet these requirements if the property is positively geared.
Key benefits
SMSFs allow you to invest in property without the full tax disincentives you might encounter outside of super. Your fund will be able to deduct loan interest but will enjoy capital gains tax exemption as you will be of retirement age when and if you sell. Income earned from the property will also be taxed at the superannuation bracket of 15%, rather than the higher percentage it would attract if part of personal income.
Another winning point is diversification. SMSFs are required to have investment strategies that satisfy diversification rules. A super fund wouldn’t usually invest directly into a residential property, so you are adding another string to your bow when it comes to spreading risk.
Finally, as with any investment class in an SMSF, you can tailor your super to invest in the assets you believe in. In this case, you might want a certain type of property in a specific location that will best help your retirement.
Key downsides
The limited personal access you have to the asset means you won’t be able to sell it to access emergency funds. It also means you, or your friends and family, can’t use the property in any way.
If you were buying a house in a holiday location, you wouldn’t be able to stay there, and neither would relate parties.
You also can’t renovate to add value, only make repairs that maintain the property’s original state, so this may mean plenty of work to be done when you eventually retire.
These are just some of the many complex rules and restrictions for investing in super. Even with professional help, SMSF trustees spend hours each month on fund admin and thousands of dollars a year on ongoing expenses such as legal and financial advice, auditor’s fees, management expenses and levees.
