A growing number of property investors who have exhausted their personal borrowing capacity are now turning to their self-managed super funds (SMSFs) to secure additional financing. At inSynergy, we have observed an increase in clients seeking to borrow through their SMSFs for property investment. Many investors are eager to capitalise on the anticipated rise in property prices before interest rates decline. However, most find it challenging to secure additional financing due to a roughly 30 percent reduction in their borrowing capacity caused by recent interest rate hikes.
Using an SMSF for property investment has become a popular strategy for experienced investors who have maximised their personal borrowing capacity. Depending on their super balance and regular contributions, investors may be able to borrow on average from $500,000 to $800,000 within their SMSF compared to borrowing in their personal names.
The process of borrowing within an SMSF is relatively straightforward. Serviceability is based on the current superannuation balance, past and current contributions, and the rental income of the proposed property. This approach is beneficial as it allows investors to start with a clean slate. Personal living expenses, mortgages, and income outside the super fund are not considered, provided the SMSF meets the liquidity requirements, typically around 5-10% of the property’s purchase price are met.
Although borrowing within an SMSF comes with higher interest rates, typically about 1 percent higher than mainstream mortgages, the market is becoming more competitive. Recently, Resimac introduced a new SMSF product, indicating an increase in second-tier lenders entering the SMSF space. As competition grows, borrowing within an SMSF is becoming more affordable and accessible.
Investors should first consult with their accountant or financial planner. This step ensures the SMSF aligns with their retirement objectives and incorporates diversification into their investment strategy, which is essential for maintaining liquidity in their funds.