SMSF Lending : Your Step-by-step guide

SMSF lending continues to grow apace. MPA catches up with several experts in the SMSF lending sector to offer brokers a guide on how to tap into this expanding market and put a successful SMSF deal together

Are you interested in getting into the SMSF lending market but not quite sure where to start? Over the following pages, MPA speaks to a number of industry leaders to put together a step-by-step guide on how to do an SMSF deal.

From finding SMSF clients and marketing your services to them, right through to post-settlement, our panel of experts offer their essential advice for brokers looking to tap into this growth sector.

STEP 1: MARKETING YOUR SERVICES

How does a broker go about getting SMSF clients to walk through their door? Thinktank director Per Amundsen suggests there are two main sources of SMSF limited recourse borrowing arrangement (LBRA) business.

“The first is where individual brokers have made a conscious effort to generate this new line of activity through further education and professional development on their own part, and then reached out to their existing professional connections,” he says.

The second source of clients, he says, is existing SME business operators who have become aware of this borrowing structure and already have SMSFs set up – or are considering doing so and have then approached their brokers.

“The advantages for SME owner-occupiers of commercial premises can be really significant,” says Amundsen. “But the real key for brokers is making sure that clients who want to take the opportunity further get the right advice from qualified and licensed experts.”

Homeloans general manager, sales, Greg Mitchell suggests marketing your SMSF lending services in all forms of media – from traditional to social media platforms – to make the most of a growing market.

“Over the past 12 to 18 months there has been a huge focus on the SMSF market, so it’s important for interested brokers to look into the benefits of SMSFs, and, if they deem it a right fit for their business, to then tap into this active sector,” he says.

“The booming property market – in certain states and regions – has certainly seen good increases in this sector, and this, combined with potential clients’ ability to manage their own superannuation funds, will ensure there will continue to be strong interest.”

La Trobe Financial’s senior vice president, asset and origination, Paul Wells, adds that, in the first instance, marketing your SMSF lending services is simply a case of including the SMSF option in your general networking and marketing dialogue.

“Typically, brokers will have fertile ground already in their client base, and the work they have done to build this base remains a key strategy. This is particularly the case for clients with more mature profiles or financial capacity,” he says.

“Relationships with accountants, financial planners, investment advisers and lawyers can all also lead to potential client flow.”

He reassures brokers that this is not an overly complicated process.

“Remember, a broker’s core function remains to efficiently and effectively provide the lending solution and to service the client’s process,” he says. St.George Banking Group mortgage broking general manager Clive Kirkpatrick also points out that forging strong relationships with relevant professionals, such as financial planners and accountants, can be the key to finding SMSF clients.

“It is important for brokers to demonstrate that residential lending within SMSF is a valid and workable option for trustees, and that they can add value to the services these professionals provide,” he says.

“Brokers should invest in their own education and understanding on lending in SMSF and develop a unique value proposition for professional referrers.”

AFM director Iain Forbes adds that there’s also a simple but effective method of finding SMSF clients that can be incorporated into your existing process.

“When a broker interviews a client and completes a statement of assets and liabilities, and notes that the balance in the super fund is, say, $200,000, the immediate response should be: ‘Have you considered buying a property in your own super fund?’ ” he says.

AMP Bank head of sales and marketing Glenn Gibson agrees that simply making it clear to your clients that you’re able to offer SMSF lending options can bring clients out of the woodwork.

“Brokers will have clients who have already set up their own SMSF or are thinking of doing it in the future,” he says. “By letting their clients know that they can assist in arranging the finance for any property purchases within SMSFs, it will set them up as the first point of contact.”

STEP 2: IDENTIFYING SMSF CLIENTS

As has been touched upon in Step 1, it’s likely that your existing client book will already contain clients who may be interested in purchasing property through their super fund.

Forbes points out that, seeing as superannuation payments are compulsory for all PAYG workers, existing clients who have been working for, say, 20 years could have a large enough super fund balance to consider investing in property through an SMSF.

Amundsen elaborates on the subject of exploring your existing network to find potential SMSF clients, explaining that brokers should identify customers that fall into the following categories:
  • Experienced or active real estate investors (residential or commercial)
  • SME business operators who are owner-occupiers of commercial property, or are renting business premises and may wish to consider buying

He adds that, while there is no set minimum, a reasonable starting super fund balance – and a meaningful level of expected future contributions – are prerequisites when considering which clients would be suitable. He suggests that the costs of setting up and administrating an SMSF start to be outweighed by the benefits once it reaches around the $200,000 mark.

When it comes to finding SMSF clients outside of your existing client base, Amundsen recommends trying to connect professional contacts, such as accountants and lawyers, as much as possible. He stresses, however, that it’s important to ensure you’re properly informed and qualified in the SMSF lending space, so that you’re able to provide a high level of service to the client once the referrals start coming in.

SMSF compliance obligations and regulatory requirements make for a complex environment both in the set-up and in the annual responsibilities of management thereafter,” he says.

“For brokers, there are a variety of formal courses provided by a number of organisations, such as the MFAA, and many lenders will supplement this with their own training and will usually assist introducers with their first few transactions.”

Mitchell agrees that SMSF lending can be a healthy addition to a broker’s business if they have strong affiliations with financial planners, accountants or lawyers. And the referral arrangement can be mutually beneficial in both directions.

“By working collaboratively with such professionals, there may also be opportunities for brokers to identify opportunities within their existing client base – those who have SMSFs and are interested in investing directly in residential property,” he explains.

Another interesting method brokers can employ is profiling; in other words, using industry data to screen your client base for those customers who are most likely to be interested in the SMSF option.

As Wells explains, “applicants are usually between 35 and 55 years of age, more so the older half, and in a financial position to have made or be making contributions to build enough super to justify an SMSF”. He adds that brokers shouldn’t discount clients who don’t already have a property portfolio under their belts, as setting up an SMSF may give them an opportunity to become property investors for the first time.

STEP 3: THE CLIENT INTERVIEW

Once you’ve introduced the SMSF option into the conversation, Gibson cautions that brokers are not able to give advice when it relates to SMSFs, so the questions you ask the client should revolve around what features and benefits the client would like their SMSF loan to have.

“The importance of having a loan with an offset account that the client can use as the cash hub for the SMSF could be one such question,” he says. “How the client wants to utilise their SMSF loan and associated products is important for a broker to understand so that the right option is offered.” Amundsen adds that a broker can provide expertise in the arranging of debt, and any advice on setting up an SMSF or establishing investment strategies that may include acquiring property on a leveraged basis requires specific qualifications as determined by ASIC and the ATO.

But, while you may not be able to offer advice yourself, he believes it’s important to ask who the client has turned to for counsel. Ideally, they will be receiving professional advice from a financial adviser, accountant and lawyer, but they may need to be nudged in the direction of asking for professional help.

“Because SMSFs really are ‘self-managed’, individual trustees or directors of corporate trustees who are the SMSF members don’t have to obtain outside advice,” he explains. “This, however, can be a real pitfall for those that may not have the expertise in property investment or an in-depth knowledge of the regulations governing SMSF LRBAs – which is complex, very detailed in nature and constantly subject to change.”

Once you have established where the client is getting their advice from, Amundsen suggests finding out what exactly their financial planner, accountant and/or lawyer have advised them to do.

“This is essential to support their desire to borrow through their SMSF to acquire a property and hold that property all the way through to the time they reach retirement,” he says.

Other questions to ask, Amundsen says, include ‘What is the market value of the property being considered?’ and ‘What is market rent if it is to be owner-occupied?’ This second question, he explains, is very important, as it must conform to the Superannuation Industry (Supervision) Act (SISA) requirements that govern SMSFs.

Wells suggests that the fundamental question clients need to ask themselves is whether purchasing a property in an SMSF meets their investment strategy and any other personal requirements. Potential considerations the client should bring up with their advice team include diversification, investment horizons, liquidity and potential financial support or guarantor obligations.

He adds that it’s also important to ask the client if they have sufficient assets and income in the SMSF to service the loan, or the personal capacity to make additional contributions if required, for example, when rental income fails.

“All costs and loan repayments must be paid by the SMSF, so borrowers need to ensure there are sufficient funds and cash flow available within the SMSF to service the loan,” he explains.

“Finally and more specifically, once a property is in an SMSF the client loses the ability to obtain any cash out on the property or – if it is a residential property – occupy it. These can be two significant negatives to applicants.”
 
QUESTIONS TO ASK

What are the key questions to ask clients who are interested in borrowing to purchase a property within their SMSF?

Greg Mitchell
  • Do they currently operate through an accountant/financial planner?
  • What is their understanding of SMSF?
  • What is their income?
  • What are their short- and long-term plans?

Iain Forbes
  • Would you like to consider investing in property through your SMSF?
  • Are you aware that your monthly contributions and the rental from property will go towards paying off the mortgage?
  • Did you know that, provided rent and contributions meet the cost of repayments and other outgoings, a borrower may not have to subsidise any shortfall to cover the repayments?

Clive Kirkpatrick
It’s important to have a good understanding of the client’s position and whether the loan amount will be suitable for them. Aside from learning about their current financial position and savings capacity, we also need to know:
  • How does their super fund operate? Are they the only members and trustees? Does the fund allow for property investment? Have company super assets and ongoing contributions been directed to the fund?
  • Is there is a custodian established with a trust deed? If not, do they have a company set up for this purpose?
  • Have they received written advice? From a financial planner and legal practitioner.
  • Have they found a property yet? If so, have they entered into a sale of contract yet? If not, what are they doing to source a property?


STEP 4: THE SET-UP
While brokers aren’t qualified to set up an SMSF on their client’s behalf, this is a process the client will need to follow if they haven’t already got an SMSF in their name.

Kirkpatrick suggests finding a good referral partner who specialises in SMSFs and can help the client with the set-up process. He explains that the cost to the client will vary, depending on the service provider and the complexity of the arrangement.

“One of the key benefits potential trustees see in SMSF is that it reduces the overall cost of managing their super relative to the cost of retail superannuation funds. People considering an SMSF need to assess the cost of set-up and running the fund against what they are currently paying, to determine its worth,” he says.

On the issue of costs, Gibson explains that the price tag attached to setting up and running an SMSF can vary depending on the fund’s total super balance, their fund’s investment strategy, and how the client chooses to manage their fund.

He also points out that clients will need to go and see someone who is licensed to set up an SMSF, such as a financial adviser or accountant, and this professional’s advice will also help the client to decide if an SMSF is really for them.

SMSFs are not for everyone, and people should think carefully before deciding to set one up,” Gibson says.

“The client needs to make sure they get the right advice around gearing strategies, specifically around purchasing a property in super as an alternative to a personal investment property. A financial planner can also advise on insurance, including income protection and other life insurance.”

He adds that professional administrators can manage the compliance and reporting aspects of an SMSF, such as keeping fund investments and transactions up to date, as well as looking after tax returns and the annual audit.

Wells puts the cost of setting up an SMSF at between $1,200 and $2,500. However, if a corporate trustee is required, then the cost could be increased by up to $1,000. In some cases, though, he explains that the SMSF can be created for free if the client is willing to keep an ongoing relationship with their service provider.

He explains that current practice is trending towards a financial planner or investment adviser packaging the set-up process for the client and procuring the requisite services or documents. This process includes creating the SMSF trust deed, while the trustee will also need to open bank accounts on behalf of the SMSF.

It’s crucial to ensure that the SMSF trust deed allows the trustee to borrow to purchase property. There are also fees attached to the ongoing administration of the SMSF, he explains.

“Ongoing, typically either an accountant will undertake tax and reporting compliance, or, increasingly, a full-service administration platform will be managed either by the adviser or planner, or a third-party service,” he says. “Either way, administration costs will be in the order of $1,500 to $2,500, excluding investment management fees.”

Clients who may baulk at the administration costs are technically allowed to administrate the fund themselves, according to rules laid out by the ATO, but Amundsen points out that their website strongly recommends that you “consider appointing a professional to help you”.

He adds that the ATO’s literature lists a variety of options and reasons why the client might choose to work with an accountant, lawyer, tax agent, fund manager and/or a financial adviser.

“The cost varies quite widely from about $1,000 up, depending upon how much advice you seek or require, beyond establishing the trust and trustee arrangements,” he says. “This is one of the reasons why an SMSF does not work particularly well for small amounts of retirement savings.”

STEP 5: DOING THE DEAL
When the client has ticked all the advice and compliance boxes and is ready to seek a loan to purchase property within their SMSF, Wells offers some reassurance that the borrowing structure itself isn’t as complicated as you might think.

“It does introduce a separate party who will hold the property – the bare trustee – but otherwise it should be no different from any loan to a trust,” he explains. “Nor should there be any difference to the structure between a residential or commercial property.”

He explains that the key parties in the loan transaction are:
 
  • The borrower: This will be the SMSF trustee, and can be a company or individuals. Wells notes that La Trobe Financial will allow individual trustees but some financiers will not.
  • Registered proprietor: The bare trustee (also known as custody trustee or property trustee) must be a company, and it holds the property until the loan is repaid.
  • Guarantors: The members of the SMSF are usually required to provide personal guarantees for the transaction.

“In terms of property investment, it is worth noting firstly that an SMSF corporate trustee must be incorporated prior to executing a property purchase contract, and secondly that a requirement to have a separate corporate trustee appointed to a bare trust brings with it a potential further incorporation cost of up to $1,000,” Wells explains. “The bare trust deed can be executed prior to settlement and should come free of charge from a lender’s solicitors.”

Kirkpatrick notes that brokers are able to assist with the loan application and ensure that the customer has had the appropriate independent financial advice from a planner or accountant.

“The broker completes the application and provides supporting documents on behalf of the SMSF,” he says.

“Certified copies of the SMSF trust deed and custodian trust deed are required for the bank’s panel solicitor to review and certify compliance. On approval, a loan offer document and security documents are produced and sent to customer’s solicitor for execution.”

However, Mitchell warns that lending is just “one piece of the puzzle” and clients will need to get independent financial and legal advice as part of the application process.

“The overall process is very involved, so it’s vital to use the relevant experts for the different components,” he says.

Gibson adds that the structure of an SMSF loan is slightly different to a normal residential loan in that the affordability is based on the super fund and its members.

“The borrower is the trustee to the super fund, while the security is held by the trustee to the bare trust,” he explains.

“Due to the nature of a limited recourse borrowing arrangement a financial planner or accountant will structure the super fund in the appropriate format, allowing the broker to concentrate on the lodgement and subsequent approval of the required loan.”

There are some differences when it comes to SMSF borrowing for commercial property versus residential property, explains Amundsen. He notes that the requirements for an SMSF to invest in residential property are very different from those for commercial property, which qualifies as ‘business real property’ under the SISA regulations. “When making such an investment on a geared basis using an LRBA, the lender will look at the loan applications differently, and so, if it is a commercial property that is involved, brokers will need to know and understand how lending for commercial property is different from residential investments,” he says.

“On top of that, the regulations with respect to acquiring and disposing of property to related parties are different – they are allowed for commercial and not for residential – and similarly for occupation by related parties.”

However, he adds that, while the regulations vary, the structure is the same in both cases, and properties that are part of an SMSF LRBA must be held in a bare trust for the beneficial ownership of the SMSF. The property must also be a ‘single acquirable asset’.

STEP 6: POST-SETTLEMENT

Once the deal has been done and the loan is settled, Forbes suggests that brokers arrange a post-settlement meeting with the client to make sure the loan has been set up in terms of the borrower’s requirements. He notes, however, that this is a matter of general good practice, rather than being something that is SMSF specific.

“This applies to every mortgage, not just SMSF,” he says.

Amundsen agrees that it’s worth staying in touch with the client, if only to make sure you’re front of mind should they need any future mortgage assistance.

“One way to do that is most lenders will want to receive a copy of the SMSF annual return,” he explains.

“From 1 July 2013 the financial statements must be prepared by a registered SMSF auditor, but the broker can be involved in seeing that these are provided to the lender annually, and in that way keep in touch with both the clients and the lending institution.” Wells echoes Forbes and Amundsen’s sentiments in stating that settlement of the deal should be fairly conclusive and clean, notably so if it is a typical long-term loan.

“From a commercial perspective, perhaps the main issue is to maintain a relationship with the client, potential client network and commercial partners, with further dealings in mind,” he says.
 
Essential Documents

What are the key items of paperwork and supporting documents that are required?

Iain Forbes
  • Application form
  • Identification of directors
  • Copy of purchase contract
  • Trust deeds
  • Documents supporting set-up of super funds
  • Bank statements of super fund
  • Statement of monthly contributions
  • Copy of existing lease

Glenn Gibson
  • Application form
  • Two payslips or two tax returns to show super contributions
  • Rental income evidence
  • (In some instances, 12 months’ evidence of contributions, showing current fund balance)
  • Certified copies of SMSF trust and bare trust
  • Contract of sale
  • Normal evidence of identification

Clive Kirkpatrick
  • Evidence of ongoing contribution to the fund of which they are a member
  • Copies of the current SMSF trust deed
  • Any incorporation certificate for corporate trustees
  • Audited tax returns and signed auditors’ statement if the fund is existing
  • A bare trust with a certificate of incorporation

For the security property, customers need to provide:
  • Copies of relevant pages of contract of sale
  • Rental opinion letter from a real estate agent or copy of management agreement for serviced apartments
  • Copy of latest super fund account statement (existing SMSF or rollover funds), showing member’s holdings as evidence of funds to complete


This feature is lifted from Mortgage Professional's July 2014 issue. Download to read more!

 

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