SMSF Loan (LRBA) | SMSF Lending with an SMSF Offset Account linked to the Loan Facility
Many Australians are familiar with loan offset accounts which they have in place as their day to day transaction accounts, the money in the offset then reduces the interest payments on their home loan mortgages. The key advantage to this is that the applicable mortgage interest rate is only charged on the net amount of the loan leading to interest savings which in turn reduces the loan faster.
In the SMSF lending environment a loan offset account be linked to a property loan otherwise known as a limited recourse borrowing arrangement (LRBA) but only under certain conditions which we will explore below.
What is a Offset Account?
It is a bank deposit account such which is linked to your home loan mortgage account. No interest is earned on the offset account but rather the offset account reduces the loan balance for interest calculation purposes. This means that that the mortgage rate is only applied to the net debt meaning your monthly payments are decreasing the loan principal faster due to the lower interest charges.
The simple advantage of utilising an offset account connected to the mortgage is your home loan is paid off faster.
For example
Home Loan ̶ Loan Offset account = Net Balance
$650,000 ̶ $150,000 = $500,000
Interest is only paid on the loan balance
What does a Self-Managed Super Fund need to Consider?
A SMSF trustee needs to consider the borrowing rules under S67A of the Superannuation Industry Supervision Act 1993 (SIS). The borrowing rules allow a SMSF to borrow money to purchase SMSF properties (real estate) or some other assets of the SMSF but there are strict rules which focus on what the financial institution is allowed to seize in the event a trustee defaults on the loan.
In relation to an offset account the biggest pitfalls include:
- redrawing equity from a loan is restricted to maintenance and repair of a property so redraw facilities are generally less useful than the use of offset accounts
- the rights of the lender are limited to the asset acquired which means the SMSF loan agreement cannot allow the lender to have security over the offset loan account
Why are the above Considerations Important for SMSFs?
Specialist non-bank lenders are now the primary lenders in the SMSF loan market as most major banks have withdrawn from the SMSF market following the royal commission. Banks are licensed to hold deposit accounts and are known as Authorised Deposit-taking Institutions (ADI’s). The ADI’s are separate accounts which can be linked to a mortgage but are not part of the mortgage.
Specialist non-bank lenders are not ADI’s and a direct loan offset account for investment property loans cannot be offered by them.
However, some specialist non-bank lenders are forming relationships with ADI’s, which include credit unions, to provide an offset account for their SMSF borrowers which is a separate account with a different BSB and account number.
Some specialist non-bank lenders may provide an offset loan account which is only a sub-account of the loan which can be problematic and lead to audit issues such as:
- the offset account could be deemed to be a separate acquirable asset as it is part of the mortgage arrangement and could breach the borrowing rules
- if the sub account is not deemed to be a separate asset it may be deemed to be available for redraw purposes which is not permitted under SIS unless it is only used to repair or maintain the property.
Why should you have an SMSF Loan Offset Account?
Apart from paying the loan of quicker one of the most significant advantages is flexibility to:
- pool the fund’s cash including contributions and investment income which is not required for general SMSF operations to minimise the loan facility balance reducing the interest payable on the loan
- cash availability – withdrawals can be made from the offset account if the cash is required for future investments or other considerations
Key Takeaways | SMSF Lending
- consider if an offset loan account should be linked to your SMSF LRBAs with a detailed review of the loan terms, whether your lender of choice offer SMSF offset accounts and how these investment loans work into your investment strategy.
- ensure the lender who is offering an offset account is providing a separate deposit transactional account and is not merely a sub-account of the loan
Do you need help with understanding SMSF Loan Offset Accounts?
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