Superannuation borrowing is arguably the fastest growing area of superannuation investment. There is an increasing demand for superannuants to take more control of their superannuation.
During the Global Financial Crisis (GFC) many superannuants were cashing in their industry, retail and corporate superannuation funds and establishing a self managed superannuation fund (SMSF). The main objective of people establishing SMSFs following the GFC was to:
1. Reduce the possibility or probability of future negative returns;
2. Invest in term deposits to maximise their income yield as companies were cutting their dividends; and
3. Have more direct control over the investment strategy of their superannuation.
Our experience is that clients are now focussing on the opportunities in the market, as opposed to recognising the threats. New employees, executives and business owners are exploring the opportunity of purchasing business or residential properties in their personal superannuation fund. Changes to the borrowings provisions in the Superannuation Industry (Supervision) Act (SIS Act) have also accentuated this.
The attraction with borrowing and property at present is that residential investment properties typically have gross rental yields of greater than 5.4%. Further, the Reserve Bank has recently lowered interest rates by 50 basis points, or 0.50%. Investors are able to service a loan at an interest rate of 6.8%* per annum. For example, if the tenant is paying 5.4% gross rent, the investor needs to make good the difference of 1.4%, assuming that the property is 100% geared.
If, for example, you have $100,000 in your superannuation fund or you would like to purchase an investment property for, say, $500,000, your self-managed superannuation fund would need to borrow $400,000. If the interest rate of the loan is 6.8% the total interest cost would be $27,200 per annum. The total gross rent received would be $27,000. The difference, excluding the property cost, would therefore be $200 per annum.
This difference does not need to be funded by your personal savings, however you can use your 9% statutory super to finance this shortfall, plus any associated property costs such as water and council rates.
Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your SMSF needs. For advice about whether borrowing in your SMSF is right for you to get the best chance at the lifestyle you want, contact the Financial Planners here at Quinns by submitting an online enquiry or calling us on 1300 QUINNS (784 667) to book an appointment.