Buying a house can be challenging, particularly if you have doubts about your current or future financial situation. But there are plenty of different methods you can use to enter the housing market, like using your super to buy property.
The process of using superannuation to buy a property is known as an “SMSF (Self Managed Super Fund) property purchase”. It’s a great way to get into the property market earlier as it allows you to borrow from a lender using the funds in your super account.
Unfortunately for first home buyers, it’s not the best method to get a property that you intend to be your Principal Place of Residence (PPOR). You can only use the SMSF approach if it’s purchased with the sole purpose of providing retirement income, and not as an intended residence for fund or family members.
However, for home buyers who are either considering starting a SMSF or are already in one, there are a number of compliance and regulatory obligations to be aware of. So, read on to find out if using your super is a good idea for you.
What is a Self-Managed Super Fund?
A SMSF is a type of super fund managed by its members, rather than an external trustee. It’s a private fund, and can typically hold up to 6 members.
SMSFs are regulated by the Australian Tax Office (ATO) and can be either an individual or corporate trustee structure.
While there isn’t a minimum balance to start your own SMSF, you generally see better cost-effectiveness once there’s a balance of over $250,000 so you’re borrowing less against the asset.
There are certain benefits to setting up SMSFs, but they involve a lot of work. SMSF members are equally responsible for making every decision and complying with every regulation.
SMSFs can be a great choice for a number of reasons, such as:
- Flexibility and more choice over their investment options (including investments in artwork, physical gold and other collectibles).
- Any property investment that creates rental income can be used to provide an income stream for you and any additional members of your SMSF.
- A 15% concessional tax on voluntary contributions ( for now until further changes to the rulings in the future)
- Superannuation pooling with each member, allowing for a higher investment amount and better returns.
There are also some common tax deductions involved with a SMSF, like:
- Interest expenses on borrowings used to acquire income-producing assets
- Depreciation on assets used to produce income (like an investment property)
- Fees and charges associated with managing the fund, such as accounting and audit fees
- Insurance premiums for life insurance of fund members
- Voluntary contributions made by members to the fund
However, SMSFs have stringent rules and obligations that have to be adhered to, so they’re certainly not for anyone who isn’t confident with their knowledge.
Among other obligations, SMSF owners have to pay an annual supervisory levy to the Australian Taxation Office (ATO), maintain financial records and have statements and tax returns prepared by an accountant. Independent audits also need to be conducted.
But for experienced property investors, using a SMSF to buy a house could be a great addition to your portfolio.
How Does Using Your Superannuation to Buy Property Work?
If you’re considering using superannuation to buy a property, then the first thing you need to know is that it cannot be done using a regulated fund, such as a retail or industry super fund.
Plus, borrowing against your superannuation to buy a house comes with very stringent conditions, even if you’re eligible.
This is because it’s technically known as a Limited Recourse Borrowing Arrangement (LRBA) which precludes trustees from borrowing money – except in the event of property investment.
If investing in property is consistent with your SMSF investment strategy and risk profile, then it can be a great way to increase your retirement funds and build out your investment portfolio.
However, borrowing adds complexity to your SMSF, so it’s important to get advice from a licensed financial adviser who can explain the risks involved.
The risks associated with investing in property through a SMSF include:
- Cash flow: You always need to have sufficient liquidity or cash flow to meet expenses, like loan repayments, insurance premiums, and property expenses.
- Loan balance: You must ensure there is a strategy in place to repay the loan in case of illness, disability, or death of members.
- Possible tax losses: Tax losses from the property can’t be offset against taxable income outside the fund.
- No alterations to property: You aren’t able to make changes to the property until the SMSF property loan is fully repaid.
Is There a Catch to Using Superannuation to Buy a Property?
There are strict rules and regulations surrounding SMSF property purchases, whether it’s a commercial property or otherwise.
For example, the property must be acquired solely for the purpose of providing retirement benefits to the members. It cannot be used for personal use by any of the members or their relatives.
Additionally, the SMSF must not borrow money, on top of what they’ve borrowed against their super, to purchase the property. It also must be acquired at market value.
When using an SMSF to buy a house, you’ll also need to ensure that the SMSF has sufficient funds to cover the purchase price, as well as any associated costs such as stamp duty, legal fees, and ongoing property management expenses.
SMSF property sales may also have many fees and charges. These fees can add up and will reduce your super balance.
So before you commit to an SMSF property purchase, do your research so you understand all associated fees and charges, as they can significantly impact your overall super balance.
- Upfront fees
- Legal fees
- Stamp duty
- Ongoing property management fees
- Fees associated to real estate agents
- Bank fees and loan costs
Choosing the right path to buy a house is difficult, and using your SMSF can be a challenging one. But SMSF property loans can also be the perfect approach for many people.
If you’re interested in purchasing a home with your super, The Mortgage Agency can help.
We offer a holistic approach to home loans and can help you obtain a mortgage that fits your unique circumstances. Contact us today to get started.