SMSF loans assist Australians to invest their superannuation in a residential or commercial property. They are an incredibly complex loan scenario that needs expert advice and professionals working for you to ensure the correct structure and strategy is in place. You’ll need to understand the fees and charges that are involved, as well as how to be legally compliant in your loan structure.
Loans are generally up to 70%, sometimes 80% of the purchase price, never any more than this. You will also need to have a minimum of 10% of the debt value in your SMSF as residual cash to cover any expenses that may crop up. As an individual, you do not pay the loan from your personal income. Payments come out of your Superannuation to pay for repayments and costs on the property.
- You are not allowed to do any major renovations on your property in a SMSF as the regulators do not want to see your SMSF funds going into construction.
- You are also not allowed to ever live in this property even in retirement.
It is important to know that your self-managed super fund actually can’t borrow money, but a Bare or Custodian Trust can. The Bare Trust is the missing link between you and the SMSF. When you have paid off the loan the trustee company will transfer the asset into the SMSF.
Your Super is a big part of your future financial stability! It’s complicated, so always seek the best advice, ask many questions, research, and think long-term. Whilst it is a very popular loan structure it is not necessarily suitable for everyone.
Generally the absolute minimum amount you should have in super before you start considering this is $200,000. You will need to obtain a Statement of Advice from your financial professional.
Sage Loan Services has a great team of finance professionals who can set this up for you so that you can make an informed decision. As mortgage brokers we simply facilitate the advice you have been given and from here we can find the most suitable SMSF loan for your personal situation.
What are Reverse mortgages?
Reverse mortgages are a specialised products for applicants aged over 65, who are equity rich, and cash poor. For example, a pensioner may need to supplement their income to improve their quality of life, or simply require a lump sum to purchase a new car.
So how does it work?
A reverse mortgage is not repayable until death of the applicant, or sale of the property, no repayments are required to be made until then. Repayments are not required, as interest is capitalized. This is why the product is coined ‘reverse’, the home loan balance actually grows over time.
This does not mean that you cannot make repayments however. If you take out a variable reverse mortgage, you still have full control over repayments, and if you choose to pay principle and interest you can still amortize (pay off) the loan in full. As a result, some elderly applicants may derive benefit where their current home loan interest rate is much higher. An analysis should be undertaken of all fees and interest rates when refinance to ensure a benefit is evident.
Why would you, or someone like your parents need a reverse mortgage?
Presently banks are regulated by ‘Responsible Lending’ legislation, and they must prove that they do not get applicants into a debt without a strong ‘exit’ strategy. For this reason, it can be very difficult for an aged pensioner, or someone out of work on a small annuity or otherwise, to obtain approval for a mortgage. If you can’t prove your capacity to repay a normal loan, you will find it near to impossible to borrow. A reverse mortgage can overcome this obstacle by releasing the equity tied up in your property. Banks found a niche market in the aging population of Australia can no longer depend on welfare for a reasonable standard of life. Pensioners who own their own home but cannot afford a heating bill is something of concern, when solutions such as these are available. Similiarly, it may be as simple as a senior citizen just wanting to enjoy their retirement (when life begins!) and wish to buy a camper, or have a bit of fun; a reverse mortgage is not ‘policed’, the applicant can spend the funds on virtually anything once approved.
What if the applicant is not making a sound decision? What about the family home?
You cannot simply walk into a bank and have a reverse mortgage issued to you. There are minimum policy criteria, plus the requirement to
1) seek independent legal advice
2) seek independent financial advice (if you are a pension recipient you can access the free financial advice service offered by Centrelink, they can help ensure that you won’t lose benefits, and the finance must be structured accordingly – so take heed of this important step)
Other minimum documents, disclosures, information must be handed to you by the bank in accordance with guidelines.
What are the reverse mortgage restrictions?
Any reverse mortgage applicant must obtain independent legal advice, independent financial advice, and is encouraged to discuss the proposition with family members also before proceeding. Also, once you have a reverse mortgage in place, the bank can request that certain standards to the building are kept in order, with some lenders charging a valuation inspection fee to ensure the house remains in good condition.
What about Negative Equity?
The fear for some borrowers, is that equity in their homes over time may get ‘eaten up’ by accrued interest, to the point where the mortgage value exceeds the property value. This could particularly be the case if the applicant has a long life span, or the property market drops significantly, or a combination of both. Sage Loan Services and all of its reverse mortgages lenders have extra specialised accreditation with Mortgage & Finance Association of Australia (MFAA) and thereby adhere to the “No Negative Equity” guarantee. This ensures that even if a mortgages value outstrips the value of the property, there is no recourse on the applicant provided they continue to adhere to the banks guidelines on that product. This gives peace of mind that the applicant can never lose their property via a forced sale if this happened.
Here’s a great little resource for you from ASIC, a Reverse Mortgage Calculator that you can play with to help identify what the impact of a reverse mortgage will be on the equity in the house in x amount of years https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/reverse-mortgage-calculator
Applicants are encouraged to use such tools and consider the outcomes with professional advice, and family members before obtaining this type of loan.
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