While an SMSF loan is significantly different from a standard residential property loan, it doesn’t need to be vastly more difficult to write, as The Adviser discovers
Writing a self-managed super fund (SMSF) loan is a little bit like riding a bike, says Liberty Financial’s general manager for commercial finance, Suresh Pillai: once you’ve learnt how to write one effectively, the process is simple and something you’ll never forget.
According to Mr Pillai, some brokers believe incorrectly that writing SMSF loans is “complex and difficult”.
“While I think a lot of the myths associated with writing SMSF loans have dissipated over the past two years, we still do hear some concerns that SMSF loans are complex and difficult to write,” he says.
“It’s a lot like writing an investor loan and a bit like riding a bike. Clients may not be aware of the ability to acquire property via an SMSF and brokers can play an important role in providing relevant product background information.
“Brokers need to exercise caution to ensure that, unless appropriately qualified, they avoid providing financial advice. And once you’ve done one or two you won’t look back.”
RESIMAC’s chief operating officer Allan Savins agrees, noting that before writing an SMSF loan, brokers need to understand that the loan is a unique lending structure.
It requires the property being purchased to be legally held in a bare trust (or property trust), with the SMSF itself acting as mortgagor.
SMSF lending is influenced significantly by the Superannuation Industry (Supervision) Act or ‘SIS Act’. A breach could make the fund non-compliant with the Act, with a potential financial penalty applied.
Once brokers understand these basic principles, however, writing SMSF loans is not a complicated process, according to Mr Savins.
“It’s true there is more to consider and to be aware of with an SMSF loan compared to an ordinary home loan,”
he says. “ at said, there is a lot of help, support and training available. Brokers are quite capable of handling these loans if they put in the time to learn the basics. The most complicated part of the process can actually be taken care of by the lender’s panel lawyers.”
Another common belief held – incorrectly – by many brokers is that the only difference between an SMSF loan and a standard home loan is that the applicant is the SMSF, Mr Savins continues.
“Brokers who haven’t received any specific training in this area don’t realise that the SMSF is actually the mortgagor and not the entity noted on the contract of sale,” he says.
“As a separate property trust must be the legal owner of the property and noted as the purchaser on the contract, brokers need to advise their clients about the importance of establishing the correct property trust prior to contract exchange.”
But while writing SMSF property loans is actually a lot easier than many brokers believe, there are still challenges associated with these products.
As Mr Savins explains, brokers need to set time aside for training in the SMSF sector. Writing the loan might be relatively straightforward, but brokers must understand how an SMSF works before they can sell the product. They need to be aware of exactly what a client can and cannot do with their loan, since many borrowers come to a broker with wild misconceptions about the products.
“Another challenge that brokers face when writing an SMSF loan is managing client expectations,” Mr Savins says.
“This is vitally important, since SMSF loans generally take a longer period [to process] from start to finish than an ordinary home loan. On top of that, clients may approach brokers before they even have their SMSF set up – which can extend the entire process.”
Homeloans’ general manager for sales, Greg Mitchell, says the best way to overcome any challenges associated with writing SMSF loans – including managing client expectations – is to partner up with someone who is licensed to provide financial advice.
“Brokers will often need to refer their client to a financial adviser to help them with the matters that are outside of their own licensing and area of expertise, which is why it pays to have a good relationship already with a financial planner, solicitor or accountant,” he says.
Pioneer Mortgage Services’ national sales manager, Tony Dale, agrees that having a good relationship with a referral partner is paramount.
“It’s all about communication,” he says. “Any challenges can be overcome through communication firstly through your BDM. Then, once the process is in place, with all the related parties.”
The products available
Once a broker has a good understanding of the intricacies of SMSF loans and a referral relationship set up with a financial adviser, the next step is to understand exactly what products are available to SMSF borrowers.
RESIMAC’s SMSF loan product was designed to fill a market niche, according to Mr Savins.
The product allows clients to borrow up to 80 per cent LVR, has low set-up fees, no ongoing account keeping fees and interest only options available up to 10 years.
Liberty Financial offers a product called SuperCredit, which also lets clients borrow up to 80 per cent.
Mr Pillai says the package is underpinned by a streamlined process that aims to reduce the documentation impost and up-front costs to borrowers.
For example, borrowers can establish an SMSF borrowing structure for as little as $695.
“Recently, we have also seen increasing interest in our SuperCredit commercial offering, particularly from borrowers seeking to invest in high-yielding, smaller sized commercial properties in the under-$300,000 price range,” Mr Pillai says.
“They are attracted by our cost structure as well as our lending approach.”
Pioneer offers a Classic SMSF that has a maximum LVR of 80 per cent and a variable rate of 6.48 per cent.
According to Mr Dale, Pioneer can accept NRAS under the SMSF product and issue conditional approvals subject to structure being put in place.
Homeloans offers clients a ProSmart SMSF loan with a maximum LVR of 70 per cent, although the lender is set to extend that to 80 per cent in coming weeks.
“We are pleased to say that we have been recording good volumes in this space and we expect to see that continue into the future.”
Macquarie, one of the biggest players in the self-managed super fund space, offers brokers a snapshot of some of its SMSF features
The rules that govern SMSF property loans are complex – for many brokers, it’s a new area from which they tend to shy away.
Under SMSF legislation, brokers are not allowed to provide financial advice to clients, so borrowers entering into an SMSF property loan will need to obtain that from elsewhere.
Just because brokers can’t provide advice, however, doesn’t mean they cannot ask questions to get their clients thinking about whether buying a property within their SMSF and taking out a loan to do so is right for them.
Macquarie believes education for all participants – including brokers and their clients – is key.
It is essential, according to the lender, that brokers understand the intricacies associated with SMSF products. Macquarie has therefore highlighted the key features of its SMSF property loan package.
• Max LVR (company trustee): 80%
• Max LVR (individual trustee): 80%
• Application fees: $500
• Legal fees: Up to $1,300
• Interest rates (variable): 6.35% p.a.
• Interest rates (fixed):
- 1 year special rate 5.76% p.a.
- 2 year special rate 5.80% p.a.
- 3 year rate 6.20% p.a.
- 4 year rate 6.50% p.a.
- 5 year rate 6.50% p.a.
At the end of a fixed-rate period, the interest rate reverts to the applicable variable rate.
• Ongoing monthly fees: $15
• Interest-only available?: Yes
• Personal guarantee required?: Yes
Macquarie will provide, in principle, approval prior to establishment of an SMSF and holding trust in order to offer the client a level of comfort.
The lender offers a further 0.10 per cent discount on the variable rate when a client’s non-SMSF loan is submitted with their SMSF loan application. This discount can be applied to a loan of the client’s choice.
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