Property in SMSF may be an impediment
When purchasing a property through a self managed super fund, the timing is absolutely crucial due to the impact it may have on your personal borrowing capacity, warns Smartline Personal Mortgage Advisers.
Due to the personal guarantee required by most lenders when buying a property in super, the SMSF strategy may best be suited to those in their 50s and older, Smartline's executive director, Joe Sirianni, said.
“For those keen to tap into the growing equity in their existing properties to purchase more properties in the future, this can be a real impediment to fast-tracking wealth creation,” Sirianni said.
“Many people don’t realise that providing a personal guarantee is reducing their borrowing ability by that amount,” he said, referring to investors' personal borrowing capacity.
“While you might not have actually incurred that debt, in the eyes of the lender, it has to be allowed for in any assessment of borrowing ability.”
With lenders more comfortable in recent years to lend to SMSFs, it's still a vastly different situation to those buying a property within another structure, he said.
Take the example of a couple who borrow $400,000 in their super fund to buy an investment property, with the associated personal guarantee. The SMSF receives the rent from the investment property, yet the guarantor is liable for the debt outside the SMSF.
Twelve months later they want to upsize the family home and look to borrow another $300,000 to do so. The $400,000 loan and associated guarantee means they are not able to borrow the additional funds for the family home.
While an SMSF property strategy can be successful, he warns that investors need to be looking at the whole picture.
“There are some real benefits to buying property in your super fund versus personally – when you retire. You just don’t want a SMSF loan to restrict you before you do retire," he said.
This may mean that for those in the younger age brackets, it may be best to consider investing outside of your super.
“However, once you move to an age of about, 50 or 55, where you don’t want to borrow any more money because you own your house and you’ve got a couple of investment properties, that’s then probably a better time to buy through your super fund."
