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A beginner's guide to buying property through your super
June 8, 2023
A beginner's guide to buying property through your super
By Kellie Cowie
Published on February 1, 2023
Hearing from people that they've used their superannuation money to buy a property might leave you feeling like you are missing out on some property market 'magic trick'. So, how does it work?
One of the growing ways people manage their superannuation is by moving their money from industry or retail superannuation funds that manage your investment for you into a self-managed super fund (SMSF) which provides freedom to control how retirement savings are invested.
This option is only for some as it can be an expensive, time-consuming and hands-on approach to managing your superannuation where the onus falls on you to ensure your investments comply with various superannuation and taxation laws.
How it works
SMSF lending allows you to combine your existing superannuation funds with a loan to purchase an investment property. This can be either a residential property (house or apartment) or commercial premises (e.g. warehouse or office space).
When planning what type of property to buy and whom you plan to rent it to, the ATO stipulates a strict checklist of conditions to determine if a particular property is suitable and whether the purchase transaction can be completed compliantly.
It is important to remember that your SMSF must fulfill the sole purpose test to be eligible for super fund tax concessions, meaning it cannot be used for any purpose besides providing a retirement benefit to the members. The ATO advises that there can be civil and criminal penalties if these conditions are not correctly applied.
SMSF lending
Not all lenders offer products suitable for SMSF lending, so professional assistance can help you find the right loan to meet your needs. Interest rates and application fees on SMSF loans can vary greatly and be higher when compared to other types of residential home loans.
The type of loan offered is called a limited recourse borrowing arrangement (LRBA). An LRBA protects the SMSF as a whole by safeguarding other assets held by the SMSF from the lender if the loan defaults.
Costs to consider
- Establishment costs - the initial costs of setting up all of the required legal entities, purchasing the property, and applying for a home loan can be expensive and need to be considered.
- Ongoing cash flow - you must have enough cash flowing into your SMSF to cover ongoing expenses like loan repayments and other property costs, including insurance, council rates and property management.
- Paying out the loan - once the home loan has been paid off in full (up to 30 years after the property purchase, depending on the loan term), the legal title of the property needs to be transferred out of the holding trust (known as a Bare Trust) and into the SMSF, which may result in government taxes like stamp duty being payable (again), as it is classified as a sale of the property.
Getting started
So, you understand how it works and have decided you would like to explore your options. The first step is to build a team to guide you through the process.
It would be best if you had some or all of the following:
- An accountant to crunch the numbers and ensure tax laws are considered;
- A financial planner to create a holistic investment strategy for your financial future. They'll take into consideration your overall financial needs and objectives;
- A legal professional to create the required legal entities and to navigate the legalities for you;
- A mortgage professional to guide you to the right SMSF lender's product for your needs. They are also invaluable team members in helping you to successfully complete the application process through to the settlement of your new property and beyond.
Once you have established your dream team, it's time to set up the required SMSF entities. Then you can crunch the numbers and apply for home loan pre-approval (so you know how much you can spend on a property). Then it's time to go shopping.
To read the original article, please visit A beginner's guide to buying property through your super | Money magazine
IMPORTANT INFORMATION
THIS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION ANDAUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.
In October a rise in bond yields, coupled with a rising US dollar and waning impacts of the Chinese stimulus in September saw growth assets generally fall with bonds also producing negative returns. Despite the US FED starting the easing cycle in September with a 50bps cash rate cut, longer dated bond yields rose in October by ~50bps as markets priced in a more pro-growth agenda from China and also potential higher inflationary pressures in the US post the election. All eyes in the US are on the US election (5 th November) and whilst the polls show a very close call between Trump and Harris, the market implications for a new US President remain unclear. The ability of the future President to enact policy will be dependent on control of the House of Representatives and Senate and the willingness to push through policy. After five months of gains Australian large cap equities fell by 1.5% in the month with Financials and Healthcare the major positives, conversely Energy, Materials, Consumer Staples and Utilities all sold off aggressively. Currency hedged global equities fell by 0.9% and with the Australian dollar falling versus the US Dollar by 3.3 cents (-4.8%) to close the month buying US$0.65872, unhedged equities were up returning 3.9%. The Australian 10-year government bond yield rose by 51bps to 4.50% and the Australian 2-year government bond yield rose by 43bps to 4.05%. The US 10-year government bond yield rose by 50bps to close at 4.28% and the US 2-year government bond yield rose by 53bps to 4.17%. Benchmark Returns
In September, the US Federal Reserve cut the US Fed Funds rate by 0.5% to 4.75-5.00%. US inflation appears to be under control with August data revealing US inflation at an annualised rate of 2.5% p.a. much lower than the 9% p.a. peak seen in 2022. US employment whilst resilient has softened, justifying a more accommodative monetary policy stance. The European Central Bank also cut rates in the month by 25bps to 3.50% following on from their previous 25bps cut in June due to falling inflation and slower economic growth. The surprise cut and stimulus came from China towards the end of the month. China’s economic growth has been tepid since COVID-19 related shutdowns. The property market has been in a crisis, there’s low consumer confidence, discretionary spending has fallen, overseas investment has reduced and China’s GDP growth target for the year at 5% looks to be a challenge. How did China stimulate? They reduced the amount of cash that Chinese banks must hold in reserve by 50bps, freeing up 1 trillion yuan (~A$140bn) of liquidity. China also reduced mortgage rates by an average of 50bps, reduced the downpayment required for second home purchases from 25% to 15% and they plan to issue 2 trillion yuan (~A$280bn) in special sovereign bonds to further invest in the economy. All of these actions saw Chinese equities rally (up over 20% in the month) alongside materials stocks that had been sold off aggressively on the recent Chinese economic weakness. Unfortunately, in September the Middle East conflict escalated to much more extreme levels since the conflict started back in October 2023. With the Hezbollah leader having been killed, retaliation has been high with nuclear threats rising. At the same time the Russia-Ukrainian conflict continues and without the US acting as the “world’s police”, hope is needed that both these conflicts abate with minimal further loss of lives. Markets have shrugged off both of these conflicts. However, if they continue/escalate further then supply chain issues and higher inflation risk destabilising investment markets. Australian large cap equities rose by 2.8% and in doing so closed at a new record high. The Materials sector was the strongest up 13% thanks to the Chinese central bank stimulus, Financials broadly flat and Healthcare falling the most in the month down 3.2%. Currency hedged global equities rose by +1.4% as the Australian dollar strengthened versus the US Dollar by 1.5 cents to close the month buying US$0.6913 and unhedged equities returned -0.5% The Australian 10-year government bond yield rose by 3bps to 3.99% and the Australian 2-year government bond yield fell by 6bps to 3.62%. The US 10-year government bond yield fell by 12bps to close at 3.78% and the US 2-year government bond yield fell by 28bps to 3.64%. Benchmark Returns
In early August markets were volatile as almost simultaneously the Bank of Japan hiked interest rates at the same time as US employment data was released showing that payrolls softened. This led to the Japanese currency strengthening versus the US Dollar which in turn saw Japanese equity markets fall by over 20% in a day and US technology stocks sell off as the unwinding of the infamous “carry trade” occurred. However, by month end markets were little changed as fears of a massive unwinding of the carry trade dissipated. What is the carry trade and why is it important? Effectively the carry trade is a decades long phenomenon whereby investors borrow in a low yielding currency (i.e. the Japanese Yen which has yielded almost 0% since 2000) and invest in higher yielding assets and/or equities. When the Yen strengthened as quickly as it did in early August some investors were forced to repay their borrowings in Yen by selling the assets that had been bought with the cheap currency. Whilst the unwinding of the carry trade has the propensity to dislocate asset markets, the extent of how much needs to be unwound (if it at all needs to be unwound) is up for debate. What was witnessed within markets in August was that buyers were willing to step in and purchase assets that were sold off resulting in a rather benign month in terms of end returns. US inflation data fell to an annulised rate at the end of July of 2.9% which led to the US Federal Reserve Chair claiming that the “time has come” to start cutting US interest rates, potentially by up to 0.5% when the FED meets on the 18-19 th September. In Australia the unemployment rate rose to 4.2% in July. Importantly, this increase in unemployment was due to a record high participation rate of 67.1% indicating that there is a high number of people in jobs and looking to find jobs. The RBA held interest rates at 4.35% in August. Australian large cap equities rose by 0.7% with very few surprises in the August reporting season. Unhedged Global equities were negative in the month (-1.2%), mainly due to the weaker US Dollar as investors priced in an increased probability of a cut to the US Fed Funds rate next month. Currency hedged global equities rose by +1.8% as the Australian dollar strengthened versus the US Dollar by 2 cents to close the month buying US$0.6765 The Australian 10-year government bond yield fell by 15bps to 3.97% and the Australian 2-year government bond yield fell by 20bps to 3.67%. The US 10-year government bond yield fell by 13bps to close at 3.90% and the US 2-year government bond yield fell by 34bps to 3.92%. Benchmark Returns
Australian markets were influenced in July by a slight softening in inflation data that saw bond markets go from pricing in a potential rate hike at the next RBA meeting (5 th - 6 th August) to a potential rate cut by February. This lifted Australian equites to new highs and also saw bond yields fall (prices increase). Australia’s annual headline inflation data whilst it rose to 3.8% in the June quarter (up from 3.6% in the March quarter), the core inflation number (a key focus of the RBA) fell from an annualised rate of 4.0% to 3.9% insinuating that the RBA cash hikes may have done their job. Chinese growth ambitions softened in the month with retail sales falling due to the knock-on negative wealth effect from lower property prices and low wage growth. China still has ambitions of a 5% growth target for 2024 however the current stimulus of infrastructure investment and more recently a cut in the short- and long-term interest rates are not having the desired impact. Australian large cap equities rose by 4.2% with strong returns from the majority of sectors. Materials and Energy were negative for the month as global growth, and particularly Chinese growth, softened lowering the prices of key commodities. Global equities were positive in the month, with unhedged global equities up 4.0%, however many of the mega cap tech companies that have dominated the returns over the last year were mostly negative as investors used softer outlooks and potentially stretched valuations for some of these companies to rotate away and invest into the previously out of favour sectors. The Australian 10-year government bond yield fell by 20bps to 4.12% and the Australian 2-year government bond yield fell by 29bps to 3.88%. The US 10-year government bond yield fell by 37bps to close at 4.03% and the US 2-year government bond yield fell by 49bps to 4.26%. Benchmark Returns
Australian inflation data in May came in at an annualised rate of 4.0% which was slightly ahead of expectations and moved up from an annualized rate of 3.6% in the 12 months to April 2024. The stronger than expected CPI quashed hopes of a cut in the Reserve Bank of Australia (RBA) cash rate in the next few months and increased the probability the RBA may need to raise rates at its August meeting. Australian large cap equities rose by 1.2% led by the Financials and Consumer Staples sectors. US equities were again strong led as the Artificial Intelligence thematic continued to resonate with investors and propelled NVIDIA to become the world’s largest listed company with a market capitalisation that breached the US$3 trillion level. The European Central Bank (ECB) reduced its key deposit rate by 0.25% to 3.7% in June, the first cut to rates since 2019. Similarly, the Bank of Canada reduced its overnight rate to 4.75% from 5.0% in June which was the first cut since March 2020. Hedged global equities rose by 2.29% whilst unhedged global equities rose by 1.61%, the Australian dollar strengthened by 0.3% in June buying US$0.6670. The Australian 10-year government bond yield fell by 10bps to 4.31% whilst the Australian 2-year government bond yield rose by 4 bps to 4.16%. The US 10-year government bond yield fell by 10bps to close at 4.40% and the US 2-year government bond yield fell by 12 bps to 4.75%. In June US inflation for the year to May was released with the annual rate of inflation falling to 3.3% (down from 3.4% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. US bond yields responded favourably to the improved inflation data over the month. Benchmark Returns
In May US inflation for the year to April was released with the annual rate of inflation falling to 3.4% (down from 3.5% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. Despite the higher inflation print bond yields, or to put it another way, the expected future cash rates fell assisting US equity valuations. Australian inflation data in April came in at an annualised rate of 3.6% which was slightly ahead of expectations. Also released in April by the Australian Bureau of Statistics was the unemployment rate which rose slightly in April to 4.1%. These data prints have led the market to believe that future cash rate expectations are an accurate assessment of risks and rewards to the Australian economy i.e. the RBA is unlikely to cut rates soon and bond yields were fairly static in the month. Australian large cap equities rose by 1.0% led by the Information and Technology and Utilities sector. Further effervescence in Artificial Intelligence (AI) led by strong earnings reports helped lift US large cap technology names. The expectation that the European Central Bank (ECB) will cut rates led to European equities posting strong returns led by the financial and real estate sectors. Hedged global equities rose by 4.0% whilst unhedged global equities rose by 2.0%, the Australian dollar strengthened by 1.4% in April buying US$0.6653. There was little change to Australian bond yields, the Australian 10-year government bond yield fell by 1bp to 4.41% whilst the Australian 2-year government bond yield rose by 2bps to 4.12%. The US 10-year government bond yield fell by 19bps to close at 4.50% and the US 2-year government bond yield fell by 18bps to 4.87%. Benchmark Returns
In March equities moved higher and many markets continued making new all-time highs as bond yields fell slightly driven by the further expectation that central bank rate cuts are due to occur in 2024. However, the Bank of England, the European Central Bank and the US Federal Reserve are yet to cut rates after their recent tightening cycles. The Bank of Japan (BOJ) raised rates in March which is their first rate hike in 17 years and they have finally moved away from negative interest rates. Inflation has exceeded the BOJ’s 2% target over the year. The BOJ statement was “dovish” in its tone and markets shrugged off the rise to a cash rate of 0-0.1%. Conversely, the Swiss National Bank was the first “G7” (a group of seven advanced industrial economies) central bank to cut rates with a reduction of 0.25% to 1.50%. The US Federal Reserve (FED) held rates steady in March. However, they did slightly raise their growth and inflation expectations for 2024. Despite the increase in inflation and growth expectations FED members are still forecasting three rate cuts in 2024. The RBA met on the 19th March and left the cash rate unchanged at 4.35%. The RBA noted that “while recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out”. Australian large cap Equities rose by 3.1%, the only sector that didn’t advance was Communication Services (-0.6%). Australian Real Estate Investment Trusts (A-REITs) rose by 9.7% and Energy (+5.3%) and Utilities (+4.8%) also performed well. Hedged global equities rose by 3.4% whilst unhedged global equities rose by 3.0%, the Australian dollar was relatively flat in March buying US$0.6521. One dynamic seen in markets in March was small and midcap companies, that over the last 12 months have underperformed, outperformed large caps - the belief that a recession will be avoided, funding costs will reduce and profit taking in the large cap names that have done well assisted this cohort of stocks. The Australian 10-year government bond yield decreased by 15bps to 3.99% and the 2-year government bond yield decreased by 6bps to 3.68%. The US 10-year government bond yield fell by 5bps to close at 4.21% and the US 2-year government bond yield fell by 2bps to 4.63%.year government bond yield rose by 22bps to close at 4.25% and the US 2-year government bond yield rose by 43bps to 4.65%. Benchmark Returns
In February as per in January the US and Australian equity markets continued to move higher and achieve further new all-time highs. During the month US inflation fell to 3.1% annually from 3.4% driven by a decline in petrol prices. Offsetting lower petrol prices were higher housing and food costs. It’s worth noting that Core Inflation (which excludes volatile items such as food and energy) was flat at 3.9% annually. Australian inflation was reported late in February and came in at 3.4% annually, the same level as the prior month. The conclusion from these data prints is that whilst inflation is to a degree contained, there’s still a way to go before inflation is back between 2-3%. Longer dated bond yields rose in the month reflecting this dynamic. The RBA kept the cash rate on hold in February at 4.35%. The US Federal Reserve didn’t meet in February. Investor focus remains on how many rate cuts will occur throughout 2024 and 2025 and potential opportunities in bonds as markets reflect these changes. As an aside the RBA will no longer meet 11 times a year opting for eight times a year with the meeting held over two days, the next meeting is scheduled for March 18 th -19 th . Australian large cap Equities rose by 0.9% driven by the Information Technology (up 19.5%) and Consumer Discretionary (up 9.2%) stocks with the Materials and Energy sectors the laggards falling by 6.0% and 5.0% respectively. Hedged global equities rose by 4.7% whilst unhedged global equities rose by 5.9%, as the Australian dollar weakened by 1% in the month to US$0.6496. US equities were the standout (+5.3% in USD terms) as some of the larger technology companies released earnings and outlook statements that re-ignited investor fervour for those companies exposed to the Artificial Intelligence theme. The Australian 10-year government bond yield increased by 8bps to 4.15% and the 2-year government bond yield decreased by 1.5bps to 3.74%. The US 10-year government bond yield rose by 22bps to close at 4.25% and the US 2-year government bond yield rose by 43bps to 4.65%. Benchmark Returns
In January the US and Australian equity markets achieved new all-time highs delivering returns for the 12 months to 31st January in their local currencies of 20% and 7% respectively. US equities were lifted by the strength of the “Magnificent 7” labelled stocks being Microsoft, Meta Platforms, Tesla, Apple, Alphabet, Amazon, and NVIDIA. The rally in equities was driven by cooling inflation coupled with the expectation that a hard landing, i.e. a recession, will be avoided and that cash rate reductions will start to occur soon. Therefore, risks to equity returns going forward have lessened. Bond yields didn’t move significantly in January noting that in December yields fell significantly reflecting the future potential cash rate reductions due in 2024 and 2025. The US Federal Reserve (FED) met in January and elected to maintain its current 5.25-5.5% cash rate setting. Despite low inflation in the US employment is still very strong. The market is expecting lower cash rates in 2024, however the FED needs to ensure that they do not create a second wave of higher inflation that will be even harder to tame. At the end of January the Australian Bureau of Statistics reported that inflation in Australia for the December 2023 quarter rose 0.6% and 4.1% annually. The Reserve Bank of Australia (RBA) did not meet in January. Australian large cap Equities rose by 1.1% driven by the Energy sector and Financials (both up ~5%) whilst the Material sector fell by ~5%). Hedged global equities rose by 1.8% whilst unhedged global equities rose by 4.5%, as the Australian dollar weakened by 4% in the month to US$0.6565. The Australian 10-year government bond yield increased by 12bps to 4.07% and the 2-year government bond yield increased by 4bps to 3.75%. The US 10-year government bond yield rose by 16bps to close at 4.04% and the US 2-year government bond yield fell by 4bps to 4.21%. Key Developments Post Month-End The RBA met on the 6th February and elected to retain the current cash rate at 4.35% noting that "While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks. The central forecasts are for inflation to return to the target range of 2-3 per cent in 2025, and to the midpoint in 2026". Benchmark Returns
In December bond yields continued their retreat (prices increased) which in-turn caused growth asset prices to also increase further. This rapid change in direction of bond yields over the last two months has helped to deliver a 5% return in passive fixed income investments for the year and has also seen strong gains from growth assets with Australian equities up ~12% and International equities (both currency hedged and unhedged) up over 20% in the last 12 months. Both the Reserve Bank of Australia (RBA) and the US Federal Reserve (FED) kept interest rates on hold in December at 4.35% and 5.25-5.50% respectively. However, with US inflation now running at an annualised rate of 2% in the third quarter (down from 4% at the start of the year), members of the FED indicated that at least three rate cuts were on the cards for 2024 and a further four cuts penciled in for 2025 causing bond yields to rally. Australia’s unemployment rate increased ever so slightly in November to 3.9%. The increase in the unemployment rate was due to more people seeking work which led to a record high participation rate – something the RBA will be keen to understand better before they consider a potential cash rate cut. Australian large cap Equities rose by 7.2% with all sectors positive. Real Estate and Healthcare where the best performing sectors delivering 11% and 9% respectively for the month. Hedged global equities rose by 3.9% whilst unhedged global equities rose by 1.8%, as the Australian dollar strengthened by 3% in the month to US$0.6812. The Australian 10-year government bond yield decreased by 46bps to 3.96% and the 2-year government bond yield decreased by 40bps to 3.71%. The US 10-year government bond yield fell by 45bps to close at 3.88% and the US 2-year government bond yield decreased by 43bps to 4.25%. Benchmark Returns