SMSF Lending Back On the Agenda
According to Chris Booth, CEO of Lydian Finance, there has been a significant change in the Self-Managed Super lending space in the past few years that could again allow fund owners to invest part of their pool of savings into property investment. Booth and the team have been recently working with Advised clients to enable property purchases as a balanced strategy for wealth creation, with Ayre Real Estate also seeing an increase in purchases made with this method in the Sydney City precinct.
Booth says, “The fact that these residential investment loans could be provided in the retail lending space without appropriate advice is one of the key reasons the major banks are now managing and not growing their loan books. So, with the major banks pulling out of SMSF lending over the past couple of years, this has opened up non-banks to fill this gap in the market for both residential and commercial property investments.
“The primary lenders in this space are Liberty, FirstMac, LaTrobe and some boutiques like Bluestone are still offering finance but are pricing the products at a premium. Aside from the conditions required for new to bank borrowers buying a property in an SMSF, there are a few lenders targeting a refinance of an existing SMSF loan,” said Booth.
Lydian’s own Senior Mortgage Brooker Darren Bryant saved himself over $7,000 in 2020 after refinancing a loan with one of the big four and reduced his interest rate from 5.5% to 4.19% with minimal fees and charges to move using this method.
Adrian Wilson, Founder and Principal of Ayre Real Estate says, “Purchasing property in a SMSF can be a great way to grow your property portfolio and achieve annuity income from the rental of the asset. We have a number of clients who have secured properties in their SMSF who have done very well. However, you must make sure that you seek the appropriate legal and financial advice before going into it. Do your homework and understand the risks and rewards fully before embarking on this journey.”
Chris’ tips to check eligibility when looking at SMSF lending as an option include:
01. Contributions
For SMSF servicing the primary income we can use to service debt is contributions from employment income. PAYG employed will tick this box. Self-employed will need 2 good years of contributions.
02. Rent Income
For standard residential properties a standard non related tenancy contract – income will be extended at 70/80% to support servicing. No holiday or temporary letting is allowed as this is an “going concern”.
03. Dividend and Interest Income
If the borrowers have a portfolio of income producing assets like shares, managed funds, cash/deposits etc, this income can be used. Lastly, the income must be able to demonstrate servicing. Lenders will use a margin above the variable rate of 2.5% – current variable rates of SMSF loans approx. 4.80% so servicing P&I at 7.30% is required.
04. Security and Loan to Value Ratio (LVR)
The restrictions include the type of property and location as well as some lenders having a liquidity requirement. Off-the-plan 60%, apartments/townhouses (more than 6 months and not purchased from a developer and houses in high-risk areas 70% and houses 80%. Remember, the value is in the bricks and mortar and land value of location. What is in the property besides fixtures and fittings the valuer will not consider in its appraisal.
05. Liquidity Ratio
The lender policies also require the SMSF fund to not be a single large asset and to have a cash buffer to manage vacancies and maintenance etc. To satisfy the liquidity requirement some lenders will need at least 10% of the loan amount to remain in the fund at settlement.
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