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6 Costly Mistakes to Avoid (when borrowing using your SMSF)

After six years of dealing with SMSF Finance applications, I’ve seen plenty of mistakes.  However, the variety of mistakes is quite limited, tInvestment Propertyhat’s right, it’s the same ones over and over again.

Here is my top 6 of all time, SMSF borrowing mistakes to avoid!

1.Designing a whole strategy to suit a property

You may start thinking about purchasing in your SMSF because you’ve found a particular property or like the idea of purchasing a type of property or area to invest in.  Whilst this is a good place to start your property research, the property is only part of the picture.

You MUST seek the advice of your planner and/or accountant about your entire investment strategy and what is involved with SMSF’s before you take any action.  Your retirement plan, what it means to you and what your end game is are all by far, better questions to be considering rather then what property to buy.

Every step your take after your develop your investment strategy will be governed by the strategy itself.  This plan will dictate (not only if you go ahead at all), but the type of property, price, return etc so that it is performing in line with the investment goals you’ve decided for your fund.

Remember the property is just another ‘asset’, no emotion allowed!

2. Thinking you can borrow for a property that will be used by family members

The property must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members.  It also:

  • Must not be acquired from a related party of a fund member
  • Must not be lived in by a fund member or any fund members’ related parties
  • Must not be rented by a fund member or any fund members’ related parties

The penalties are severe if your purchase does not meet these guidelines.

3.  Not using experienced SMSF professionals

You should look closely at all professionals that you will be engaging during your transaction.  Many, many people in the finance, legal and advice professions will list SMSF experience in advertising materials, on their website and business cards, but they may have never actually worked with an SMSF trustee.

A good way to check their suitability is to ask about their industry accreditations/qualifications specifically related to SMSF’s.

For example, The Mortgage and Finance Industry Association of Australia (MFAA) has specific SMSF Training, however only an estimated 1% of finance professionals in Australia have completed it.

My company Thrive Investment Finance is fully qualified in this area. SMSF and Investment Lending is not something we dabble in, it’s our core business.

  1. Wrong or incorrect purchaser on the contract of sale

The purchaser is the Corporate Trustee, Acting as Trustee For, The Bare Trust. E.G The Corporate Pty Ltd ATF The Bare Trust. The amount of information on the contract does vary state to state but this entity is always the purchaser.

The actual SMSF or its corporate trustee do not appear on the contract.  They are the borrower and will appear on your loan offer and mortgage document.

Get this bit wrong and it can potentially cost you in stamp duty now and/or in the future when the debt is repaid. Lenders will also ‘reject’ the contract if it is not filled in correctly.

A further caution here. Check that your Bare Trust and Contract of Sale are dated in the right order.  Again, each state varies and it’s another reason to ensure you have experienced professionals in your corner to check that you are compliant.

  1. Agreeing to standard finance timeframes

A suitable finance timeframe for a SMSF deal is 21 days minimum.  Whether you go to a bank directly or via a finance broker this is still a specialised lending product.  Staff assessing this deal for approval will be senior and/or specifically trained.  As there are less assessors with this training the ‘queue’ for processing will be longer.  Remember there are many variables with these transactions including deeds being reviewed by the lender, legal and financial sign off. They will often involve several different parties.  The extra time allows everyone to do their part accurately and in line with legislative and bank requirements.

 

  1. Relying on loyalty

Every lender has a different appetite around SMSF lending.  With some the appetite is non-existent (they don’t offer it).  Others have restrictions about the type of property, age of property, age of fund, fund balance, how much of the fund can be utilised for a purchase, how old the members are and how affordability is proven – just to name a few.

Your existing bank may not be able to assist you to execute your particular strategy for any of these reasons, regardless of your existing portfolio or history with them.  Even private banking clients and high net worth customers have been unable to secure finance in the first instance from their bank due to their restrictions.

Engaging a specialist for unbiased recommendations early in the peace can save plenty of time and heart ache for these transactions.

 

SMSF borrowing is not for everyone

DIY super and borrowing to finance a SMSF property is not for everyone and with any investments there are inherent risks.  Don’t fall in love with the strategy on face value. There is compliance to be met from all aspects including accounting, strategy, finance, audits etc.  You need to fully understand what your responsibilities are to manage and operate your SMSF now and the future.

Want more info? Get your FREE guide to the ‘ 4 Crucial Questions to ask your Finance Broker’ by clicking the header back on the home page of www.thriveinvestmentfinance.com.au

 

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