What you need to know about property investing in your self-managed super fund (SMSF)

What you need to know about property investing in your self-managed super fund (SMSF)

by | Sep 13, 2021 | Financial Planning, Investments, Property Loans

“We want to eventually retire to the coast so we will buy a property in our self-managed superfund and rent it out in the meantime. The value of the property will rise over time and when we’re ready to retire we’ll just move in.” 

We’ve heard this statement many times, but if only it was so easy. At a time when property markets are buoyant and interest rates so low, many people are considering property investment within their SMSF but the laws around what you can do, and can’t do, with the property are complex. 

Investing in residential property

Firstly, residential property purchased through an SMSF cannot be lived in or rented by you, any other trustee or anyone related to the trustees – no matter how distant the relationship. Buying a coastal property in your SMSF and moving in when you retire is therefore not allowed. When you retire you must first purchase the property from the SMSF, perhaps from the money you receive from selling your city residence. This is just like buying a regular property except you won’t have to deal with negotiations. The transaction must take place at a fair market value, based on objective and verifiable data, and will involve additional costs such as stamp duty and legal.

Investing in commercial property

Rules regarding related parties that apply to residential properties do not apply to commercial properties. They therefore can be sold to an SMSF by its members, as well as being leased to SMSF trustees or an individual or business related to them.

This exception makes SMSF commercial properties appealing to many small business owners such as barristers to buy their chambers or manufacturers who can purchase a warehouse/factory. This allows the business to pay rent to their superfund rather than ‘dead money’ to a landlord. Again, it’s important the lease agreement is at market rate and must be paid promptly and in full at each due date. 

Regardless of whether it’s a residential or commercial property, the investment must also satisfy the overarching function of the SMSF, which is to provide retirement benefits for its members (a concept known as the sole purpose test). You must consider the yield or potential capital appreciation when selecting the property and if neither makes good investment sense, you should reconsider.

The loan

Lending through your SMSF must be done by a limited recourse borrowing agreement (LRBA). The property must be owned by a separate ‘bare’ trust that sits outside of the SMSF structure and has its own trustee. All the property-related income and expenses are then made through the superfund’s bank account. These loans are specifically designed to ‘limit the recourse’ so that if the terms of the loan are breached the lender can only access the property and other superfund assets are protected. 

Given the unique characteristics of the loan, SMSF loans generally attract significant application fees and higher rates than standard home loans. The lending criteria are also much stricter and can involve things such as reduced loan to value ratios (LVR), shortened loan terms resulting in higher repayments, and often borrowers require a minimum percentage of liquid superfund assets available to make loan repayments if needed. There are also additional legal costs associated with the setup and ongoing compliance of both the SMSF and bare trust structure. These costs must be factored in to decide if purchasing in your SMSF is the right option for you.

Renovating

The idea of renovating a residential property within an SMSF to improve capital value is also more complicated than it first appears. Whilst general maintenance and repairs can be made, any significant renovations must be funded by available cash already held within the superfund and not by the loan or borrowed money. Even if funds are available, you are not allowed to make significant changes to the original property that was purchased using the limited recourse borrowing arrangement. Renovations that substantially change the asset will require a new LRBA.

Given the right opportunity, there is no doubt that buying property in your SMSF can be an excellent long-term strategy but there are clear complexities. The considerations presented in this article are by no means exhaustive and investing through your SMSF should always be done in consultation with your financial adviser and an experienced mortgage broker. 

Contact us today to discuss whether buying a property in your SMSF could work for you.

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What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

by | May 12, 2021 | Financial Planning, Wealth Management

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.

How to pay off your mortgage sooner and accelerate building your wealth

How to pay off your mortgage sooner and accelerate building your wealth

by | Mar 22, 2021 | Financial Planning, Property Loans, Wealth Management

For most people, their mortgage will be the largest debt they will have in their lifetime. Because there are no tax benefits on this type of debt, it’s worth considering paying it off (or at least partially down) quickly so can make the most of the opportunity to accumulate wealth outside the home.

So, here are a few tips which can help you get that mortgage down.

1. Get the right loan from the start

There are so many factors to consider when deciding which is the most appropriate loan. And the loan your friend has may not be the best loan for you. Just like the loan with the lowest advertised interest rate could cost you more in the long term.

2. Understand how to use your loan

Once you have gone to the effort of structuring your loan correctly, it’s important that you know how to get the most benefit out of it. For example, an ‘offset’ account may not help you pay your home loan quicker unless you have the discipline to use it as it should be used.

3. Increase your repayments – every dollar helps!

Whether it be a lump sum payment or increasing your monthly repayments, every extra dollar will result in a saving to your interest cost and thus will reduce the time to repay your mortgage. At a 2.5%pa interest rate, an additional $200 per month repayment on the average mortgage will save approx. $30,000 in interest costs. At a 4.5% interest rate, this increases to approximately $60,000 in interest costs

4. Work on your loan early

During the early years, a higher proportion of your loan repayments are going towards paying the interest expense, with a smaller portion reducing your principal owed. So, commiting to make larger additional/lump sum repayments during the initial years of your loan will repay a larger amount of the principal and so will save on the interest costs.

5. Ask your bank for a discount

You’ll be surprised with the reduction you may get on your interest rate if you just ask.

6. Better still use a pro-active mortgage broker

A great mortgage broker is invaluable. From recommending the best loan specifically for you, to explaining how to best utilize it to getting on the front foot and asking the financial institution for a discount. Our lending manager, Cameron Purdy was able to secure our client a further discount 18 months into her loan by simply getting on the front foot and negotiating with bank. It resulted in a saving of over $900 per month!

7. Build Wealth while accelerating your mortgage repayments

A ‘debt recycling’ strategy enables you to simultaneously pay off your home loan sooner, while building an investment portfolio.

So rather than wait until you pay off your loan before commencing the build up of your wealth/investments, you can start doing it now!

And while the investment portfolio is growing, the income it generates is directed towards the home loan acting as another source of repayments and accelerating the time taken to be mortgage free!

Debt recycling is an extremely effective strategy and while popular among many professionals, it is something all who have a mortgage should consider.

Download out free eBook to learn more about how debt recycling strategies allow you to start investing for the future now whilst continuing to pay off your home loan.

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Australian residential property is on fire!

Australian residential property is on fire!

by | Feb 21, 2021 | Investments, Markets and Economy, Property Loans

The latest statistics coming out of the Australian residential property market indicate we’re seeing a remarkable rebound, with approvals and finance applications soaring and prices likely to follow. For now, the real driver is free standing houses being bought by owner occupiers.

Record construction approvals

Approvals to construct new houses jumped 15.8% in December to a record high, with strength seen right across the country. CBA’s economics unit pointed out that compared to December 2019, housing approvals rose “an incredible 55%” – see chart 1.

Chart 1: Dwelling approvals were strong across the whole of Australia

Blog chart 1

While apartment approvals are nowhere near as impressive, being 19% below a year ago, they are still 44% above the low point reached in June last year when the market had been crushed by national COVID lockdowns and forecasts were for housing markets to collapse.

Residential propery prices expected to follow

While CoreLogic reports that national home prices have risen a relatively modest 1.5% compared to a year ago, with Sydney up 2% and Melbourne down 2.2%, those markets that have enjoyed less COVID disruption were stronger: Perth was up 3.7%, Brisbane 5.3% and Adelaide 6.7%.

 However, given weekly auction clearance rates and loan applications tending to be a reasonable leading indicator for house prices, the outlook for prices, especially for free standing homes, appears to be very positive. Clearance rates have roared to a four-year high – see the chart 2 below – and the value of new housing loan commitments in December jumped 9% to hit a record high of $26 billion, putting it 31% higher than a year ago.

Chart 2: Auction clearance rates have hit a four year high

Blog chart 2

Chart 3: Owner occupier borrowing has shot up

Blog chart 3

UBS forecasts Australian house prices will rise by 10% in 2021, while CBA is calling for an 8% increase.

Perfect storm

What we’re seeing is the culmination of various factors that, when combined, amount to a huge tailwind for the property market.

Interest rates: the Reserve Bank has cut cash rates to an all-time low of 0.1% and indicated they have no intention of raising them any time soon. Borrowers could have two to three more years of super low interest rates up their sleeve.

In addition, the big banks are benefiting from the Reserve Bank’s Term Funding Facility that enables them to borrow a total of $200 billion for home lending at the same rock bottom rate of 0.1%.

Banks have responded by offering fixed rate loans as low as 1.75%, with no fewer than 25 different loans currently below 2%. Not surprisingly, fixed rate loans now account for 40% of new loans, up from 15%.

Relaxed lending standards: In October last year the government announced the removal of the bank regulator’s responsible lending laws, which required banks to undertake thorough due diligence on a borrower’s capacity to repay a loan. The Treasurer said at the time the move was aimed at providing easier access to credit to help Australia’s recovery from its first recession in more than 30 years.

Stimulus spending: the stimulus packages announced in the wake of the COVID pandemic by the Australian government added up to 13% of GDP – newly created money shoved into the economy. That saw household savings jump to an almost 60-year high in June last year – see chart 4.

Chart 4: Household savings hit an almost 60-year high

Blog chart 4
A huge portion of those savings were bound to find their way into the economy through consumer spending, which we saw in the December quarter last year when the CBA Economics Unit said spending on their bank’s credit cards was 11% higher than the year before.

HomeBuilder Grant: the Federal Government also announced grants of $25,000 to qualifying borrowers who were either buying or renovating a home to live in. By the end of 2020, 75,000 applications had been received, blowing past the government’s forecast of 30,000. The scheme has been extended until March, although it’s been reduced to $15,000.

Stamp duty concessions: New South Wales and Victoria announced stamp duty concessions of between 25-50% on residential property purchases up to $1 million.

Job security: thanks largely to the stimulus juicing the economy, the NAB Business Survey shows business confidence and business conditions have rebounded to be well above their average for the last 30 years. That’s in turn prompted the labour participation rate to jump to a 35-year high and the underemployment rate to drop to its six-year average, while job vacancies are at the highest for at least 12 years.

Not as great for investors

While property prices are tipped to do well over the course of 2021, rental markets are not looking  as promising for property investors.

Nationally, CoreLogic reports rental rates went up by just over 1% for the year to the end of January 2021. That means they failed to keep pace with property prices, meaning the yield on an investment property, already notoriously low in Australia, was even worse.

Rents in apartments were markedly worse, possibly reflecting a sharp fall in international students and immigrants. In Melbourne, unit rents dropped 8% over the past year while in Sydney it was 6%.

Key takeaways

  • For those looking to buy a home, the market looks set to rise over this year.
  • While capital gain for investors is always attractive, there may well be risks in finding a tenant at current market rates.
  • Qualifying borrowers can still benefit from the federal government’s HomeBuilder grant until March.
  • For those looking to borrow to buy a home, rates are at all-time lows.
  • For those already with a mortgage, now is a great time to refinance.

Looking to buy a residential property or refinance your existing home?

Call Steward Wealth today on (03) 9975 7070 to find out how we can help you achieve a highly competitive home loan rate.

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Units or houses; which is a better investment property?

Units or houses; which is a better investment property?

by | Jan 18, 2021 | Investments, Property Loans

Prior to national lockdowns many were expecting the Australian housing market to correct anywhere from 10% to 30%. Moving forward a mere nine months and record low interest rates, home loan holidays and working from home have led to a remarkable resilience. With consumer confidence now at record highs, coupled with forecast low interest rates, stamp duty reforms (in NSW and Victoria) and talk of vaccines, all indications are that house prices across the nation are on the rise again.

After several years of decreasing investor appetite, the October 2020 ABS statistics show a significant uptick in investor loan commitments in all states except Victoria (see chart below). Whilst it is clear many believe now is the right time to be investing in property, a common question is asked is whether units/townhouses or free-standing houses provide the best investment opportunities. You will not be surprised to learn that there is no definitive answer so below we consider the advantages and disadvantages of each.

Picture1

Units and townhouses

Advantages:

  • Units prices are generally more affordable than those of houses in the same area. This also means that the deposit needed to enter the market is also lower.
  • The lower cost of units allows property investors greater means to diversify their portfolio across different markets.
  • Historically units offer greater rental yield over the long term, so they suit investors with a yield focus. They tend to be more attractive for tenants in urban areas, due to demographic trends and preference towards high-density urban accommodation.
  • Units and townhouses suit investors who wish to take a hands-off approach to the maintenance of their property as most of the upkeep is taken care of by strata management.
  • Units often contain more fixtures and fittings than a house. This generally allows the owner to claim against a greater number of depreciable items in the unit (e.g. carpets, light fittings and dishwashers). Additionally, owners of units may be able to claim depreciation deductions for common property; that is, assets shared by all property owners in the development. Deductions will always vary, and you should seek the advice of your accountant prior to making a purchase.

Disadvantages:

  • Strata fees can be a high ongoing cost depending on the level common facilities.
  • Any possible renovations or changes must be approved by strata management which results in a limited ability to add capital value to the property.
  • Most banks consider units in general, but more specifically those less than 50m2 (excluding balconies and carports), to be far riskier and hence it can be quite difficult to receive approval for your loan application. Banks are also more hesitant to lend against units anchored to a specific purpose, like student accommodation, as the factors that influence these are largely beyond their control.
  • Historically units offer less potential for capital growth
  • Units are generally suited to single or coupled tenants without children so tend to attract shorter term rental agreements.

Houses

Advantages:

  • When you buy a house, you own both the land and dwelling, which both have the potential to appreciate and produce a significant capital gain when you sell. As a result, historically houses offer greater potential for capital growth.
  • As you own 100% of the property, apart from council approval, you have an unlimited ability to renovate and add capital value to the property.
  • Houses generally come with extra space, more bedrooms and features sought after by families. As such they tend to be longer term tenants providing a less volatile yield.
  • As houses have both a land and dwelling value, banks consider these less risky and are more accommodating when applying for a loan.
  • While individual situations may vary, houses, usually, tend to be more negatively geared than units mostly due to their higher financing and maintenance costs, and lower rental yields.

Disadvantages:

  • House prices are generally less affordable than those of units in the same area. For property investors this can lead to a less diversified portfolio.
  • Historically houses offer a lower rental yield than units.
  • Upkeep and maintenance of the property is your sole responsibility and can prove to be time and cost intensive.
  • Large one-off maintenance costs, for example roof replacement, can prove to be very expensive and cannot be shared amongst others.

Conclusion

Choosing between investing in a unit, townhouse or house is only one in a long list of factors to consider. Each have their advantages and the decision should be based on what strategy or objective you are striving to achieve. For example, an investor who has the time, cashflow and inclination to improve the property may be more suited to a house. A time poor investor seeking diversification and an income stream may prefer a unit or townhouse. Other factors such as demographics, supply and demand, affordability and broader economic factors should all be considered.

It’s important to remember that direct property is only one sub-asset class and there could be others that are more suited to your risk/return expectations. For this reason, we recommend you speak to a professional, like Steward Wealth, to ensure that your investments are aligned to a broader financial plan.