Pros and Cons of Investing in a Mortgage With Your SMSF

The biggest advantage of an SMSF is its greater flexibility compared to a retail super fund, particularly in terms of investment options. One of the options you have is investing in a mortgage with your SMSF.

There are two ways to do this:

1. Borrowing from within your SMSF to buy property for commercial purposes
2. Using your SMSF funds to invest in private mortgage lending

At PSA Capital Investments, we work with borrowers who want to take out an SMSF mortgage as well as investors who want to earn income from mortgage loans via our private credit fund (with reliable returns of around 8% per annum and quarterly distributions).

Before you jump in, however, it’s important to understand what you’re getting into and what it means for your finances and retirement savings. To help, we’ve outlined the main pros and cons of investing in a mortgage with your SMSF that you need to know.

Pros of SMSF Mortgage Investments

Freedom to use SMSF funds to invest in a mortgage

Regular super funds are pooled investment vehicles that combine contributions from thousands of people and are invested together based on predetermined strategies. So you cannot choose an investment option just for yourself; you can only pick from a pre-selected menu of choices (e.g. growth, balanced, or conservative).

In an SMSF, members are trustees with direct control over investment decisions. You have the freedom to use your SMSF funds to invest in a mortgage as long as it’s in line with your trust deed and investment strategy, and it follows ATO’s SMSF investment rules.

Reduced tax

SMSFs enjoy a concessional tax rate of 15% on any pre-tax income, and that includes rental or interest payments from your mortgage investment.

This is much lower than you would pay if the returns were part of your personal income.

If you sell the property and make a profit, you’ll be charged CGT at the same 15% rate. However, if you hold the property for one year before selling, you get a one-third discount, bringing the rate down to 10%.

When you get into the pension phase of your SMSF, tax on investment returns (including CGT) drops to zero, which frees up more money for retirement spending.

Tax management and estate planning

• An SMSF gives you more control over tax management, meaning you can use various tax strategies, such as contribution timing and asset segregation, to save more on tax.
• You can use an SMSF for estate planning. For example, have death benefits paid as a pension instead of a lump sum, so the SMSF keeps operating and accruing wealth from your investments even when you’re no longer around. Or take advantage of in-specie transfer, which lets you transfer non-cash assets like property directly to beneficiaries.

No limited recourse for PSA (enhanced capital protection for investors)

When you invest in SMSF mortgages via PSA’s private credit fund, one of the ways we make sure your capital is safe is by having a trustee hold the property on behalf of the super fund outside the SMSF structure. This gives us full recourse to recover your money in case of a default.

Cons of Investing in a Mortgage With Your SMSF

• It takes a lot of time and effort to manage an SMSF. Once you start investing with your SMSF, you’ll need to dedicate even more time to running the fund.
• Any returns are locked until retirement. This is good for your retirement, but it means your investments stay illiquid for years or decades.
• There are compliance risks to watch out for. The ATO is very strict on SMSF investment rules, and it’s easy to find yourself on the wrong side of the law if you’re not careful. If your SMSF is deemed non-compliant, you could be fined and your returns taxed at the highest marginal rate.
• Investing in a mortgage puts a big chunk of your SMSF funds in a single asset, which increases risk in case of a default or property value falls.
• Because an SMSF is managed privately, you have less government protection if your investment goes south. Industry and retail super funds enjoy more protection.

Thinking About Investing In a Mortgage With Your SMSF?

Whether you want to borrow in your SMSF or you’d like to invest in SMSF mortgage loans, we can help you at PSA.

Contact us today at (03) 9847 7689 to explore your SMSF mortgage investment or borrowing options.

Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.