Red Rock Brokers Group Pty Ltd. SMSF Lending. Professional Development Day Training

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1 SMSF Lending Professional Development Day Training

2 Network News FOS membership recently expired for many members. Please your certificate to A reminder that all PI Insurance certificates of currency need to be ed to us Improved Marketing Services National Flyer Distribution Service (Design, Print & Delivered) New Website & Improved Member Zone & Templates Network numbers now over 100.

3 Loan Fraud There has been an increase in incidents of loan fraud occurring in the wider market. All members must exercise high levels of due diligence, and make reasonable enquiries to protect themselves against loan fraud. Most common types of application fraud 1. Income verification fraud 2. Bank statement fraud 3. Application particulars misrepresentation 4. Identification fraud Consequences of Fraud Termination of Lender Accreditation(s) Termination of Membership and loss of ACR status Termination of Industry Body Memberships Loss of ALL commission income Tarnished representation Inability to continue to work in the industry

4 Fraud Prevention Measures Income verification 1. PAYG Obtain minimum 2 computerized pay slips AND Group Certificate AND/OR Tax Assessment Notice 2. Check pay slips for legitimacy, overall appearance and formatting, does the income appear consistent with the age and occupation? 3. Check ABN of employer, length of ABN and GST registration status, does the employer appear to be arms-length? 4. Use google maps to check employers stated address 5. Phone employer and confirm applicant works at the company 6. Where possible ALWAYS request and obtain original documents. 7. If ever in doubt, obtain last 3-6 months personal bank statement evidencing salary deposits. Bank Statements 1. Only ever use secure PDF estatements or original statements, NEVER rely on transaction listings alone. 2. Check statements for overall appearance, run a quick balance check, check for gaps. 3. Check BSB using google. 4. Check statement dates match the transaction listings shown. Application particulars misrepresentation 1. Ensure all Assets & liabilities statements are confirm correct figures in written loan interview. 2. Confirm all declarations made by individuals are true and correct. Identification fraud 1. ALWAYS hold always follow the lenders identification criteria. 2. Original certified ID where applicant is not interviewed face-to-face, call certifier where possible and record.

5 SMSF Lending Overview What is a Self-Managed Super Fund (SMSF) Loan? SMSF Loan Fundamentals How SMSF Loans Work SMSF Loan Benefits Typical SMSF Credit Policy SMSF Lender Comparison SMSF Documents Required SMSF Funds to Complete SMSF Loan Servicing SMSF Case Study 1 & 2 SMSF Loan Approval Steps Recommended SMSF Lenders

6 What is an Self Managed Super Fund (SMSF) Loan? Self-managed super fund (SMSF) loans are investment loans offered for Australians who wish to invest their self managed superannuation in property. Commonly known as SMSF Loans they are also referred to as Limited Recourse Borrowing Arrangements. (LRBAs) SMSF loans may be used for the purchase or refinance of acceptable residential or commercial property. SMSF Loans are unable to be used for; Vacant land Home Loans (i.e. to purchase owner occupied residential property) Equity release (i.e. cash out of existing property held in or outside the fund) Acquisition of residential property from a related party (non-arms length) Construction or refurbishment (cannot be used to construct or improve a dwelling)

7 SMSF Loan Benefits Australian residents who are eligible for an SMSF loan; 1. Borrowers that have an existing SMSF (existing fund) 2. Borrowers that have just established an SMSF (new fund) Benefits 1. Lower tax rate - 15% for assets held in the fund (accumulation phase) and 0% tax on capital gains in pension phase. 2. Limited recourse the mortgagees recourse in the SMSF is limited to the secured property therefore providing a high level of asset protection, as the LRBA allows the SMSFs other assets to be protected from mortgagee recourse. 3. Cash flow - Loan balance can be reduced through a combination of rent, investment earnings and member and employer contributions. 4. Depreciation & Negative Gearing - SMSF receives all the benefits of depreciation & negative gearing. 5. Power of Leverage An SMSF loan allows the fund to acquire an asset it could not otherwise purchase.

8 How SMSF Loans Work

9 SMSF Loan Requirements 1. SMSF loans are typically limited recourse, which means that SMSF other assets are protected from the lender should a default occur. This however, does not prohibit a lender from recovering any money owing from the personal assets of the bare trustee or the SMSF trustees individually. 2. Redraw is not permitted 3. Generally, all directors of a corporate trustee must provide a personal guarantee. 4. The security custodian (bare trustee) is typically also required to provide a guarantee. 5. Independent financial and legal advice is typically required by all guarantors. 6. Loan increases are not permitted (refinance is $1 for $1 only) 7. Most lenders require the fund to meet minimum net asset requirements. (typically 10% of the total assets available in the fund after settlement). 8. Trustees must be Australian residents. 9. As of 1 July 2016, the Accountant s Exemption rule that allowed accountants to provide advice relating to the setup of an SMSF was formally removed. If accountants wish to continue to provide advice required to be a holder of an AFSL or a representative. AAMC are now running advice in SMSF and Superannuation workshops for those interested.

10 Typical SMSF Credit Policy Policy varies between lenders; LVRs up to 80% (off the plan purchases may vary) Minimum loan amounts generally $100,000 Max loan amounts up to $2,000,000 Interest only up to 5 years or principal or interest. Max loan terms up to 30 years. Some lenders require minimum SMSF net assets as a qualification criteria (i.e. 10% of the funds total assets) as residual assets. Some lenders offer offset accounts (redraw is not permitted) First mortgages only. Security property acceptability varies from lender to lender. Generally clean credit applicants only, (some flexibility with minor impairments)

11 Recommended SMSF Lenders

12 SMSF Lender Comparison Macquarie St George / BOM La Trobe Financial AMP Resimac Product SMSF Property Loan Super Fund Home Loan SMSF Residential/Commercial Super Edge Loan SMSF Max LVR 80% 70% 70% (60% OTP) 70% 80% Max Loan Amount $1,000,000 $2,000,000 $1m (res) $2m (com) $750,000 $500,000 Rates from (as of July 16) 5.67% 5.69% 6.59% 5.67% 4.89% Interest Only < 5 yrs Max LVR 70% < 15 yrs Commercial Only < 5yrs < 5 yrs < 10 yrs Offset Account N/A YES N/A YES N/A Liquid Asset requirements 10% of total debt <60yr olds 20% of total debt >60yr olds 10% of total assets 2.5% of loan amount for off the plan with no lease agreement 10% of total assets 10% of total debts Min Net Asset Req d $200,000 NIL NIL $200,000 $150,000 Servicing Policy Standard serviceability test are to be performed on Guarantors when the SMSF's serviceability is Commitment cover of 1.1:1 required where personal member contributions are required to meet minimum Low Doc assessment of member's income available Income from other assets in the fund excluded for servicing reliant on the Guarantor to make requirements for the SMSF, member(s) additional contributions above the mandatory compulsory contributions must demonstrate their ability to meet all existing personal commitments, along with the proposed additional super fund contributions. Income derived from other assets to be excluded Other Policy Notes New dwellings (<2yrs) on case by case basis only Liquid asset requirement can be waived if servicing ratio is >1.2. Do not require receipt from auditor, financial advisor or legal sign-off of the SMSF Properties completed >6 months only Properties completed >12 months only

13 SMSF Loan Documents Required SMSF Trust Deed Custodian Deed Certificate of Incorporation for the SMSF Trustee (if applicable) Certificate of Incorporation for the bare Trustee (if applicable) Purchase Contract Lease or rental appraisal for a Real Estate Agent (for purchase) Receipt for deposit paid (if applicable) Recent SMSF Bank statement showing sufficient funds to complete purchase Last 12 months statement for existing SMSF loan (if refinance) Last 2 years Audited SMSF financial statements and tax returns Last 2 years annual superannuation fund statement showing contributions (if fund is newly established)

14 SMSF Funds to Complete SMSF funds to complete should always be ascertained in the same manner as a normal loan advance with reference to; 1. Savings/Cash in an SMSF bank Account 2. Liquid Assets (Shares/Managed funds) to be used for the purchase 3. Contributions or rollovers that the members intend to make prior to loan approval. *See ATO website for more information on current contribution caps

15 SMSF Loan Servicing Most lenders have dedicated SMSF loan servicing Calculators. Some lenders require servicing evidence both inside and outside the fund where there is reliance on member contributions. Generally, SMSF loan servicing is typically based on the following three criteria; 1. Annual Member contributions - Superannuation Guarantee (9.5%) of employees wage. - Additional member contributions up to the applicable contribution cap*. 2. Rental Income - Existing and proposed rental income. 3. Investment Income - Income received on existing or residual fund assets. *See ATO website for more information on current contribution caps

16 SMSF Case Study 1 Michael, aged 40, and his partner Claire, aged 35, under the advice of their financial advisor, set up their SMSF, Smith Superannuation Fund, a number of years ago. While previously they have only invested the funds in their SMSF in term deposits and shares, they now wish to purchase property with the approximate $200,000 in cash that is held by their SMSF bank account The couple have purchased an off the plan property in Sydney s south west for $540,000 that is close to completion. The property was secured using a bank guarantee for 10% of the purchase price. A real estate agent has estimated the rent on the property to be $500-$550 per week. Michael earns $90,000 pa managing a branch of a major furniture supplier, while Claire is employed as a solicitor and is paid $103,000 pa. In the last financial year, Claire had contributed an additional $20,215 of her own into the fund. Their fund also holds $55,000 worth of shares which in the last financial year earnt the fund $4,000 from dividends paid. Michael and Claire wish to keep their fund s investment in these shares as they are providing a decent return. Tasks 1. Conduct a funds to complete calculation for Michael and Claire. 2. Calculate the assessable contributions for each member. 3. What s the likely maximum available LVR to the fund for this transaction? 4. What is the total income likely to be used in servicing the loan?

17 Case Study 1 Solution 1. Conduct a funds to complete calculation for Michael and Claire. BORROWER NAME Smith Superannuation Fund FUNDS REQUIRED $ FUNDS AVAILABLE $ Valuation Fee Mortgage Advance $ 378,000 Establishment Fee $ 500 Deposit Paid $ - Lenders Risk Fee or LMI $ - Funds from Property Sale Title Insurance Gift $ - Settlement Disbursement Fee Shares $ - Electronic File Fee Savings $ 200,000 Lenders Legals $ 500 Redraw $ - Stamp Duty & Transfer Fee $ 20,000 FHOG Conveyancer & Adjustments $ 1,000 Introducer Fee Purchase $ 540,000 Build Refinance Other Total $ 562,000 Total $ 578, Calculate the assessable contributions for each member. Michael SG (9.5%) $8,550 Claire SG (9.5%) $9,785 Claire CB $20,215 Total: $38, What is the likely maximum LVR available to the fund? 70% 4. What is the total income likely to be used for servicing? Rent ($500 x 52) $26,000 Dividends $4,000 Contributions $38,550 Total $68,550 Total Surplus or Deficit $ 16,000

18 SMSF Case Study 2 Ian and Sandra Johnson, both aged in their early 40 s, until this time have held their super in a managed fund. They now wish to have more control over their super investments and have visited their financial advisor to get some advice on setting up an SMSF. Their advisor mentions that the property market is providing decent returns at the moment however their combined $280,000 recently rolled over into their SMSF is unlikely to afford them any property given the current market and they should look at an SMSF property loan. They have established their SMSF with Ian and Sandra as individual trustees one month ago. The couple are seeking advice on an SMSF loan for a property purchase of an established property worth approx. $650,000 in Wollongong. The property was built in the 90 s and currently has tenants paying $600 a week. Ian and Sandra advise you that their current PAYG incomes are $160,000 p.a. and $72,000 p.a. respectively and that they have not made any additional contributions into their fund since rollover. Ian however, made additional contributions of $10,000 in FY 2014 and $14,000 in FY Tasks 1. What income can be used to assess serviceability? 2. What evidence will generally be required to verify the members contributions? 3. Using the funds to complete calculation, determine if the fund will be able to meet a liquid asset requirement of 10% of total fund assets.

19 Case Study 2 Solution 1. What income can be used to assess serviceability? Rent ($600 x 52) $31,200 Ian SG $15,200 Sandra SG $6,840 Ian CB (AVG) $12,000 TOTAL $65, What evidence will generally be required to verify the members contributions? Members previous managed fund annual statement 3. Will the fund be able to meet a liquid asset requirement of 10% of the total fund assets? Yes BORROWER NAME Ian & Sandra FUNDS REQUIRED $ FUNDS AVAILABLE $ Valuation Fee Mortgage Advance $ 520,000 Establishment Fee $ 500 Deposit Paid $ - Lenders Risk Fee or LMI $ - Funds from Property Sale Title Insurance Gift $ - Settlement Disbursement Fee Shares $ - Electronic File Fee Savings $ 280,000 Lenders Legals $ 500 Redraw $ - Stamp Duty & Transfer Fee $ 25,000 FHOG Conveyancer & Adjustments $ 1,000 Introducer Fee Purchase $ 650,000 Build Refinance Other Total $ 677,000 Total $ 800,000 Total Surplus or Deficit $ 123,000

20 SMSF Loan Approval Steps 1. Obtain all necessary documents and compile application for submission. 2. Obtain conditional approval 3. Order valuation 4. Instruct applicant(s) to prepare bare trust and bare trustee (if not already in hand) 5. Submit all remaining conditions to the lender. 6. Obtain formal loan approval upon receipt of valuation report.

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