Self Managed Super Fund (SMSF) Trust

A SMSF is a special type of trust that people can set up to manage their own superannuation. Like a normal super fund, your employer contributions still get paid into the fund and you can still make additional contributions as you see fit. Unlike a normal super fund, the trustee (normally you) has direct control over the assets that your superannuation is invested in.

A select few lenders now offer loans to SMSF trusts to allow them to invest in residential property up to an LVR of around 70%. The interest rates offered are around the normal home loan rates + a margin of around 0.5% - 1.0% pa.

The borrowing structure is usually set up as follows:

  • A loan is given to the SMSF Trustee.
  • A “Security Custodian” purchases the residential investment property on behalf of the super fund. This security custodian (which must be a limited liability company) then holds the property as an asset in trust for the super fund.
  • The super fund has the beneficial right (but not the obligation) to acquire the underlying asset at a future date when the loan is repaid.
  • The loan is secured against the investment property. While the loan is ideally self-servicing from the rental income derived from the property, servicing may also come from any other income received or assets held by the SMSF Trustee.
  • The loan is limited in recourse, with the Bank’s right against the SMSF Trustee limited to the lenders right as mortgagee in relation to the property.
  • There is no recourse to any other assets of the SMSF, or to either the SMSF Trustee or Security Custodian.

The tricky point here is that although they say the loan is non-recourse, lenders being lenders can’t help trying to get more security. So most require director’s guarantees from the security custodian. In most cases this just so happens to be the beneficiary of the super fund!

If lenders don’t take the director’s guarantees, the LVRs offered are normally lower and the interest rates higher. This is a really grey area, so seek independent advice before committing.