Introduction
Self-Managed Super Fund (SMSF) loans have gained popularity in recent years as a way for people to invest their retirement savings in property. While SMSF loans can be a great way to diversify your investment portfolio, they come with a set of risks that need to be carefully considered before taking the plunge. In this blog post, we will discuss three major risks associated with SMSF loans.
Risk 1: Limited recourse borrowing arrangement
One of the main features of SMSF loans is that they are typically structured as limited recourse borrowing arrangements (LRBAs). This means that if the SMSF defaults on the loan, the lender’s recourse is limited to the asset that was purchased with the loan. While this may seem like a protective measure, it can also put the SMSF at risk of losing a significant portion of its retirement savings if the asset’s value declines or the loan repayments become unaffordable. Furthermore, LRBAs generally come with higher interest rates and fees than traditional mortgages, which can also increase the overall risk of the investment.
Risk 2: Liquidity risk
Another risk associated with SMSF loans is liquidity risk. Once the SMSF invests in a property, it can be challenging to sell it quickly if needed. This can be particularly problematic if the SMSF needs to access its retirement savings due to unforeseen circumstances such as a member’s death or disability. In such situations, the SMSF may be forced to sell the property at a loss, which can be devastating for the members’ retirement savings.
Risk 3: Legal and compliance risk
SMSF loans are subject to strict legal and compliance requirements, and failure to comply with these requirements can result in significant penalties and fines. For example, SMSFs are required to have a written investment strategy that outlines how the SMSF’s assets will be invested, which may be more complex when investing in property. SMSFs are also required to keep accurate records and submit annual tax returns. Failure to comply with these requirements can result in the SMSF being deemed non-compliant, which can lead to significant tax consequences and even disqualification of the SMSF.
Conclusion
SMSF loans can be a great way to invest in property and diversify your retirement savings. However, they come with a set of risks that need to be carefully considered before making a decision. Limited recourse borrowing arrangements, liquidity risk, and legal and compliance risk are just a few of the risks that SMSF investors need to be aware of. It is essential to seek professional advice from a financial advisor or mortgage broker before making any investment decisions to ensure that you fully understand the risks involved.
It is important for SMSF investors to also consider the potential lack of diversification in their investment portfolio when investing in property through an SMSF loan. Property investment can be a significant portion of an SMSF’s assets, and if the property market experiences a downturn, the SMSF may suffer significant losses. Therefore, it is crucial to carefully consider the overall risk profile of your investment portfolio before deciding to invest in property through an SMSF loan.