Limited Recourse Borrowing (SMSF Borrowing)

If you operate a Self-Managed Super Fund (SMSF), you may have heard about Limited Recourse Borrowing (often referred to as SMSF borrowing or Gearing).

The general rule is that your SMSF can’t borrow money. But with superannuation rules and laws, there are some exceptions.

Exceptions to Borrowing with SMSF

A SMSF Trustee has the capacity - through a limited recourse borrowing arrangement - to indirectly borrow funds to purchase a ‘single acquirable asset’ (often a residential or commercial property).

So how might this work in practice, and when would you enter into a LRBA through your SMSF? This case study will give you one scenario of how a LRBA can be used to invest your super funds.

Case Study:

Investing in Property with a SMSF Borrowing Arrangement

John and Sue, as trustees of their SMSF, decide they want to invest into direct property, but don’t have enough cash in their SMSF bank account to get the property they want.

Meeting a financial adviser

In their initial meeting with a Positive Wealth adviser, John and Sue learn they can use the capital in their SMSF to put towards a property, with the bank to lend the remainder.

In the meeting, they learn that banks are generally prepared to lend up to 70% of the property value. (70% Loan to Valuation Ratio - LVR) for a limited recourse borrowing arrangement.

Choosing a Property and applying for a LRBA

The property they want to purchase is valued at $525,000. This means John & Sue need to come up with at least $157,500 (30%) of the capital from their SMSF, if the bank is to consider their application.

Luckily they have enough liquid cash in their SMSF to meet the LVR, and they are granted approval on the LRBA loan.

Updating the SMSF Structure

Now this is settled, they must revisit Positive Wealth Management, who assist them with all important procedures and paperwork.

Their financial adviser will make sure that the purchase can go ahead smoothly by checking to ensure that the SMSF is correctly set up to complete the purchase.

The financial adviser will then:

  1. Ensure that their SMSF has the requisite borrowing powers in its deed. In this case, John and Sue's SMSF deed needs to be updated to allow them to borrow under the LRBA, and their adviser arranges this update.
  2. Establish a holding trust company and a holding trust deed.
  3. Arrange stamping of the deed .
  4. Arrange singing resolutions and consents.
  5. Ensure complete compliance by passing all relevant information to the bank, the ATO and ASIC.

Once John & Sue have all documents in place, they settle on their property. The property is held on behalf of the SMSF by the holding trust until the mortgage is fully paid.

Once the mortgage is paid, the holding trustee transfers the title of the property to the SMSF.

John & Sue now own a property inside their SMSF that can be used to help in their retirement funding plans.

How can I invest my SMSF with a limited recourse borrowing arrangement?

If you'd like to find out more about your SMSF investment options and limited recourse borrowing to secure your future, then book a consult with a financial adviser today or call us on 1300 060 668.

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