Thinking of borrowing to buy in super?
We have recently helped a client through the maze of borrowing to buy a property through superannuation, before signing the contract you need to understand what is involved.
There are limits
Not just financial limits but practical ones, the loan cannot be refinanced, you can’t redraw the facility and there are significant limits on making improvements to the property. The structures are often difficult to use, and where your circumstances change the only option may be sale of the property, even where it is inopportune to do so.
Whilst you may be able to borrow the funds for the purchase, you need to consider the long term transaction, it is not like a standard loan with flexibility, these structures are rigid and not always suitable.
Sometimes, it may be easier and more practical to purchase the property in your own name or a different entity. Otherwise it may be simpler for you to be the bank and be the lender to the superannuation fund.
But the rent will cover the interest!
Often times the rent may cover the mortgage, but what about if the property requires repairs or maintenance, as the fund generally cannot redraw the facility, you are going to need to provide the funding out of the other assets of the fund.
Recent contributions caps have meant that getting money into superannuation is much harder, and with strict limits, it is not inconceivable that there will be a shortfall created within the fund, simply because there is work to be done.
Planning and understanding this structure is important, you don’t want one termite infestation ruining your retirement plans.
It’s better from a tax perspective!
Conceptually there are significant taxation benefits from hold assets inside of superannuation, especially where the property won’t be sold until you have retired, but consider that the negative gearing benefits that are available for a property purchased in your own name are significantly less in superannuation, 31.5c in the dollar difference!
Any property purchase in superannuation needs to be compared with the alternatives, and for many people, a simple personal purchase may be a better option.
What happens at the end?
A fundamental problem is that because these structures are so new there is very little appreciation of what happens after the loan is repaid, one of the biggest concerns is that there may be stamp duty consequences, so not only do you pay stamp duty when the property is purchased, but also when the loan is finished, establishing the structure to avoid is important.
We are finding that it is better to clarification upfront, to understand the risks of the transaction and ensure that what you expect to happen actually happens.
How we can help?
Prior to committing to the purchase of a property through a self managed superannuation fund we need to talk, come and see us, we’ll walk you through what the transaction looks like and if it is appropriate for you. We can develop a structure which is more beneficial for your retirement plans.