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.
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.
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:
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.