Borrowing to invest
How it’s done and is it worth it
Borrowing to invest is becoming more mainstream in SMSF strategies.
Under current laws, SMSFs can to borrow to invest under a Limited Recourse Borrowing Structure (the lender can take the property if you default on the loan, but no other fund assets).
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How can your SMSF borrow money?
The super fund trustee borrows money from a bank or a related party under a limited recourse loan to invest in a special purpose trust (one per asset).
The special purpose trust buys approved assets like property or listed shares, and must pay off the asset under a loan agreement. When the fund has paid off the asset, they own it outright.
Pros to borrowing to invest
- Buy assets you otherwise couldn’t afford
- Income and capital growth from asset
- Related parties can lend to the SMSF at a commercial interest rate (outside contribution limits)
- Buy business property or shares from a related party
Risks of borrowing to invest
- Some banks may not lend to SMSFs
- Consistent fund cashflow for loan repayments
- Changing laws – SMSF borrowing may be removed from ATO guidelines
- Borrowing can magnify losses if the asset is not performing
- Potential over exposure to one asset class
Costs of borrowing to invest
- Set up costs
- Lender may charge a premium interest rate on a limited recourse loan (there’s a higher risk you’ll default on the loan)
- Up front and ongoing borrowing costs
- Stamp duty and capital gains tax if asset transferred from a related party
Who lends SMSFs money?
- Talk to your existing lender
- A related party can lend the money at a commercial rate
- We find you a mortgage broker experienced in competitive SMSF financing