All know that a SMSF can borrow to purchase certain assets under the current legislation. This is not a difficult process however it does entail setting up some structure attached to your SMSF and purchasing the assets in the correct entity – we strongly suggest you seek professional advice before embarking on this.
The banks are happy to lend to a SMSF depending on the equity you are offering to purchase a property and the ability to repay the loan to the bank. The banks however will normally charge you around $3K - $4K in setup fees for a loan to your SMSF and the interest rate is generally higher than if you had purchased the property in your own name.
There is a way to avoid the costly setup fees and to borrow at home loan interest rates in your SMSF.
If you have equity in your own home or any other investment properties and are able to access that equity you are in a position to really drive down the cost of borrowing for your SMSF. To do this you all you do is approach your bank and re-draw from the existing equity you have in any properties owned in your personal name. You then in turn on-lend those funds to your SMSF and charge the same amount of interest that your bank is charging you. You have to formalise this by signing a loan agreement between yourself and your SMSF and we suggest you register this mortgage as well.
Let’s take an example, let’s say your SMSF wishes to purchase a property and has $150,000 in its bank account to contribute towards the purchase. The traditional way says you go to your bank and borrow the $350,000 from your bank and they would charge you large loan setup fees and higher interest rates. Better still if you have the capacity is for you as an individual to borrow the $350,000 from the bank at home loan interest rates and no loan setup fees then lend that same $350,000 to your SMSF. The SMSF repays the loan exactly the same way you are paying back your loan to the bank however by doing it like this your SMSF is effectively borrowing to purchase the property at home loan interest rates. I strongly you suggest you seek professional advice regarding this to ensure you set everything up so your SMSF remains compliant.
For more information check out my Youtube clip - https://www.youtube.com/watch?v=zAxY7BiRcWI