Happy New Year to all of our clients, referrers and followers. We hope 2016 is a good year for all of you.

Last year saw us receive many enquiries by wide-eyed investors about buying property within their Self Managed Superannuation Funds (“SMSF”). After a conversation with us — and after being informed of the requirements by banks — it’s rare that most investors will follow through. They will choose instead to either not proceed with the investment or use another borrowing entity to acquire the property (usually in their own name).

The reasons for this are that borrowing in an SMSF carries some differences to regular mortgages that most borrowers are not aware of when they first contemplate the investment. These are (and this is not an exhaustive list):

• Borrowers need to preserve 10% (sometimes more) of the total assets of the SMSF in liquid assets (most borrowers choose cash).
• The SMSF needs to demonstrate that the inflow of funds plus the return from the property will be able to service the debt.
• All SMSF’s are established as a trust. The trust must be able to borrow (a vetting of the trust by the bank’s solicitors will be able to determine this for you and can be easily rectified — at a cost).
• Most individual trustees of an SMSF are not aware that at some stage in the future, the rules governing SMSF’s will require them to eat into a certain percentage of their principal amount. This means that eventually the asset will need to be sold at arms length. If the trustees want to acquire the property in their own names this will trigger a stamp duty liability and capital gains tax within the SMSF — note we are not tax experts so you should seek your own advice from a professional planner or accountant.
• The interest rates to lend to SMSFs are substantially more than they are for normal investment property. Usually by about 1% (or more).

There are others but once we explain the above to most potential investors they want to think about it. That’s because buying property is considered an easy transaction by most borrowers. It isn’t. However, most investors are well aware of the process that’s involved. But, when you overlay the above on top of what is already a daunting process and at a greater cost, then most investors choose an easier and less expensive path.

That’s because most investors don’t have the same relationship with the cash in their SMSF account as they do with the cash in their own names. Depending on their age they see superannuation as something in the never never. Never to be accessed, never to be touched — so why not put it all on red and spin the wheel.

Most good planners will advise you against placing your entire SMSF and the associated borrowings into a single asset. But investors have seen property take off like a rocket and equities drop like an anvil. With cash rates hovering around the inflation rate, they feel that buying property is a no brainer. Diversity be damned.

Trustees of SMSF’s should take note of warnings that managed funds use when they’re spruiking their annual returns — “past performance does not guarantee future returns”. This is equally valid for the property market.

However, if you have your heart set on borrowing in your SMSF, be aware of the above and alter your expectations. Then contact your finance broker.

Rate movements

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Whilst we’re accredited with around 18 lenders across many loan products, we are not accredited with all lenders and there are only a couple of lenders that we do not deal with.

This week’s best rates* from a variety of lenders

Disclaimer: These rates may change without notice. Thyme Financial Group Pty Ltd does not set these rates. This article is meant to inform our clients about the movement in rates. Thyme Financial Group is not responsible for any changes in these rates with or without our knowledge.