It seems that the one-time great strategy of buying property with superannuation (using your self-managed super fund or SMSF) is slowly dying out.
But is it something you should still be considering?
Changes in regulations have made it much harder to buy property with superannuation, so let’s look at what exactly has changed.
When it became fashionable to buy property with superannuation
Under legislation prior to 2007, super funds were not allowed to borrow, unless in the very limited circumstances. That all changed from 1st July 2007. The government then allowed SMSFs to borrow to buy property with superannuation (or investment shares), subject to a strict borrowing conditions.
This rapidly became a popular reason for people under 50 to establish their own SMSF. In the last 4-5 years, in particular, buying property with superannuation has become very popular amongst younger Australians. By ‘younger Australians’, I mean people in their 30-40s.
This has proven to be a great strategy for many. The properties in Sydney and Melbourne went up by as much as 100 percent in the past few years, making property investment particularly attractive. Not having a spare 50-100K for a deposit, the younger generation jumped onto the idea of using superannuation money to get into property investment.
As professionals or small business owners, the average couple would have about $150-350K between them in super, by the age they 40. The legislation allowed buying property with superannuation and the banks were open to lend to the super funds with a slightly higher interest rate.
But now that’s all changed…
What’s changed with property, superannuation, and the banks?
The property market was absolutely booming and ASIC decided that it must tighten the lending requirements for the banks.
As a result, banks must now control how much of their portfolio is made up of investment loans. Therefore, borrowing via SMSFs, in order to buy property with superannuation, has become more and more difficult.
Some lenders have stopped SMSF lending altogether. The others require the super fund to have at least $250,000 in it and 20 or 30 percent deposit for the property.
Additionally, most lenders have significantly increased the interest rates for SMSFs. And to cap it all, rumours started circulating about a ban on SMSF borrowing.
So, the SMSF vehicle became less attractive for the purpose of borrowing to buy property with superannuation.
The future of buying property with superannuation
So, what’s in store for this strategy? How is investing in property with superannuation going to develop in the future?
Is SMSF borrowing to invest in shares or property (also known as Limited Recourse Borrowing Arrangements or ‘LRBA’) going to be banned or restricted to a very few who can afford a high deposit, along with a high interest rate and holding costs?
The Treasury Laws Amendment Bill was introduced to Parliament on the 25th May 2017. The Bill includes a number of amendments to the government superannuation reform:
- From 1st July 2017, where LRBA is held in the retirement phase, a credit in members’ Transfer Balance Cap will arise for repayments of LRBA if it’s done with accumulation phase money.
- The Transfer Balance Cap is limited to $1.6 million, so the repayment must increase the value of the asset in the retirement phase for a credit to arise.
It’s important to note that there are other proposed amendments to the bill – such as counting a member’s outstanding LRBA loan towards their total superannuation balance (limited to $1.6 million) – which were not included in this Bill.
With these amendments and proposed amendments in mind, it is important to consider carefully again the pros and cons of buying property with superannuation.
Please contact us if you would like to discuss how these new measures will affect your super fund and what the best strategy may be for the future. Email us at: enquiry@smsfconsulting.com.au or contact Natalia on 0432 366 690.