Can I buy my house with my super?
As of mid 2020, more than 1.1 million people have chosen to take the plunge and become a SMSF member. SMSFs are often utilised by individuals as a way of taking control of their superannuation investment. The SMSF sector holds just over a quarter of Australia’s total superannuation assets. An impressive number, especially given the extensive compliance and reporting that is required if you hold a SMSF. Investing in property is a common goal of SMSF members and the question “can i buy my house with my superannuation” is often asked.
Investing in property with your self-managed super fund
Investing in property becomes a natural progression for SMSF members looking to diversify their assets. Investing in property, whether residential or commercial, often becomes a goal of people with an SMSF however there are some stringent regulations around borrowing and how superannuation funds are invested. A critical piece of regulation called Limited Recourse Borrowing Arrangements (or LRBA) oversees SMSF lending and investment in property.
A common question people ask is “can I buy my house with my superannuation?”. The simple answer is “no”. Self-Managed Super Funds (SMSFs) can invest in property, but the members and their related parties are generally not allowed to reside in, or use, residential property that is owned by the SMSF. However, retirees may be able to access their super to purchase a house to live in provided certain conditions are met.
Why you need to know about ‘limited recourse borrowing arrangement’ or LRBA
Whilst it is possible for an SMSF to purchase property without the need for borrowing, many SMSFs will need to obtain finance to fund the purchase. A Limited Recourse Borrowing Arrangement is the only way an SMSF trustee can legally borrow money for the fund to purchase an asset (such as property). A SMSF cannot take out a typical mortgage. That is why the risks and benefits of LRBA loans are essential knowledge for anyone who wants to invest in property with their SMSF.
An LRBA loan has several special conditions compared to an ordinary home loan. In fact, not all banks or lenders offer them. LRBA loans can only be used to buy a single asset — or a collection of identical assets with identical value. If a property sits across multiple titles, for example, the SMSF will likely need multiple LRBAs.
To proceed with this sort of loan, SMSF trustees will first need to set up a separate trust known as a bare trust, as well as potentially establishing a company to act as custodian of the asset and trustee of the bare trust. The custodian becomes the legal owner of that individual property, whilst any other assets in the fund will be owned by the fund trustee.
The ATO warns that LRBAs are “generally long-term investments”
There are a number of things you need to carefully weigh up as you contemplate investing in property with your superannuation.
• Can you be sure that your super fund will be able to meet the repayments over the life of the loan, remembering these could rise and fall significantly with interest rates?
• What if you lost your income and couldn’t continue to make the same (or any) super contributions? What if there’s a dramatic change in your life circumstances?
• If your SMSF is a family affair, you’ll need to consider what would happen if one of your fund members chooses to exit the fund. Perhaps they just want to retire so they won’t be contributing as much as they were.
• Is there anything in the fine print to stop the loan being called in early by the lender? And if this happened could your asset be sold in a hurry to repay the full amount?
As we all know, the unexpected can and does happen. All the above what-ifs are not designed to put you off using your SMSF to invest in property. These are scenarios to discuss with our team of Self-Managed Superannuation Funds Specialist Advisers before making the decision to invest in property. They can talk you through the potential pros and cons for investing in property so you can make an informed choice.
Can I buy my house with my superannuation?
A common question about investing in property with a SMSF is “can I buy my house with my superannuation”. The quick answer is “no”. SMSFs can only be used for the sole purpose of providing retirement benefits to members. Residential property cannot be purchased from, or used by, the members of the SMSF or their related parties. However, retirees can potentially withdraw funds from their SMSF to purchase a property to live in, provided they have satisfied a condition of release.
Our SMSF team can navigate you through the complex superannuation legislation to ensure that your fund remains compliant.
Being equipped with the right knowledge and strategy for your SMSF can make a world of difference to your long term lifestyle — and to your peace of mind along the way.
Are you keen to further explore the benefits of using your SMSF to invest in property? Our specialist SMSF team at Pitcher Partners Newcastle and Hunter can help you understand limited recourse borrowing by answering all of your questions in plain English and exploring any scenarios particular to your situation.
If you’re ready to proceed, we recommend first speaking to our SMSF team who can ensure that the correct structures are in place.
