Before you set up a Self-Managed Superannuation Fund (SMSF) you should consult your accountant or financial adviser to ensure an SMSF is right for you. Loan options are more limited for SMSFs, however, as a credit representative of Finsure, Aluka Finance has access to lenders that will provide finance to SMSFs for approved property and share market investments.
A SMSF loan is a limited recourse borrowing arrangement (LRBA) in which an SMSF trustee takes out a loan from a third-party lender to purchase an asset or a collection of identical assets with the same market value to be held in a separate trust. If the borrower is unable to meet the repayments, the lender only has access to the assets secured against the loan; the SMSF’s other assets are protected.
As there is considerable risk for the lender with an SMSF loan, the borrower is more likely to pay a higher interest rate than with other types of loans.
As with other loans, SMSF loans may be fixed rate or variable rate loans. The benefit of a fixed rate loan is that you will know exactly what your repayments are for a period of time and can budget accordingly. With a variable rate SMSF loan the interest rate is likely to fluctuate in line with the cash rate set by the Reserve Bank, though lenders are free to adjust rates independent of the Reserve Bank. With a variable rate loan you may be able to have an offset account or be able to make extra repayments.
You will need to consider which type of loan is better suited to your circumstances.
Before deciding which type of SMSF loan is right for you, please talk to your accountant or financial adviser.
On the downside, when the fixed rate period of your loan ends you may have a high revert rate, and if you want to exit the loan early you are likely to incur a break fee.
On the downside, with a variable rate SMSF loan you can be impacted by rising interest rates, and with less certainty it will be harder to budget.