If the SMSF has enough funds for a deposit, the remainder of the purchase price can be borrowed. The SMSF can either borrow from a financial institution e.g. a bank or credit union or from the Members.

Lending is done with non-recourse borrowing arrangements. This means the lender does not have a recourse or right on other assets in the SMSF. For this reason the lender (bank) will ask the Members for a guarantee. This arrangement is generally referred to as a limited recourse borrowing arrangement.

The SMSF provides the funds for a partial payment of the property and also pays all the relevant fees. The SMSF will borrow to settle the balance.

Where a bigger deposit is paid by the SMSF on the investment property, the bank may not ask for security from the Trustees. The property will be the sole security for the loan under this limited recourse loan agreement. In the event of default, the lender only has a recourse on the property. The lender can never claim against other assets within the SMSF.

As a general rule-of-thumb a bank will borrow 80% on residential property and ask for a guarantee from the trustees, or won’t ask for a guarantee at 60% loan rates. The benchmarks on commercial property are 70% and 50% respectively. Factors the bank will assess are property quality, credit history and rental income in assessing the need for a guarantee.

Ownership

The investment property is owned by the bare trust with the SMSF having a beneficial entitlement to it. The bare trust is merely the holder of the title until the loan is paid off. The SMSF will receive lease payments from the lessee and will expense the interest paid on the SMSF loan.

After the loan is repaid the SMSF has the right, but not the obligation, to acquire the legal ownership of the investment property.

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