SMSF Borrowing: variable interest rates and interest only loans

By Christopher Balmford, MD

Several people have asked whether the Cleardocs documents for SMSF Limited Recourse Borrowing are suitable for either of:

• a loan with a variable interest rate; or
• an interest only loan.

The answers depend on whether the lender is a bank or a related party of the SMSF.

. . . and the answers — which our lawyers at Maddocks have given us — are . . .

SMSF Borrowing from a bank

If the lender is a bank, then the Cleardocs SMSF borrowing documents are suitable:

• for a loan with a fixed interest rate or a variable interest rate; and
• for an interest only loan.

The arrangements about the interest rate and about what is being repaid are in the loan documents — which the bank (not Cleardocs) provides.

SMSF Borrowing from a related party

Fixed/variable interest rate If the lender is a related party, then the Cleardocs SMSF borrowing documents are suitable for:

• a loan with a fixed interest rate. Although they are not suitable for a loan with a variable interest rate, we can arrange for you to contact our lawyers at Maddocks for a free quote for the firm to manually change your documents to allow for a variable interest rate.
• a loan in which both the interest and the capital will be repaid. Although they are not suitable for an interest only loan, we can arrange for you to contact our lawyers at Maddocks for a free quote for the firm to manually change your documents to allow for a variable interest rate. (Also we are discussing with Maddocks whether to modify our documents so that you can order directly from us a document package that is interest only. We’ll keep you posted.)

What to do? If you need a document package for a loan from a related party that is interest only or that has a variable interest rate, then call us on 1300 307 343. We will arrange for you to contact Maddocks for a free quote for the firm to manually change the Cleardocs documents to meet your needs.

If (after Maddocks has given you the quote) you decide to proceed, then here’s what to do:

• First you order the normal Cleardocs $599 SMSF Borrowing (related party) document package.
• After you order the documents from Cleardocs, you email them to Maddocks and instruct Maddocks to manually change the documents to allow for a variable interest rate or an interest only loan. You can discuss this with Maddocks when you order.
• Maddocks will manually change the documents you ordered through Cleardocs to suit your needs. Maddocks will then send those documents to you ready for signing.

More information

You can read more information about our SMSF Borrowing documents here — for example, what’s included in each package.

Cleardocs Breakfast Seminars - SMSF Borrowing

Danni Kirwan, Marketing Executive

Earlier this week, Cleardocs hosted seminars in Melbourne and Sydney focusing on SMSF borrowing through instalment warrant arrangements. We’ll be posting a video of the seminar on the Cleardocs website in mid August.

We organized the seminars in response to the large number of queries we were getting on our helpline about our new SMSF borrowing products.

The Seminars were presented by Julian Smith, a partner at Maddocks. Some of you may have spoken to Julian over the years on our legal helpline, or seen him present at our previous seminars; Fiona Da Silva from St George Bank in Melbourne, and Wayne Scott from NAB in Sydney.

We had a great turnout from Cleardocs customers keen to find out more about this relatively new opportunity. Our audience proved quite inquisitive, challenging Julian, Fiona and Wayne with some tricky questions — you can see it all on the video.

The banks gave a great insight into their restrictions and considerations for instalment warrant borrowing, and pointed out some of the things commonly overlooked. Did you know:

• that a property held under an instalment warrant arrangement can’t be used to secure an overdraft? And
• that an arrangement using funds borrowed through an instalment warrant can’t be refinanced? Though Julian did outline an innovative solution he arranged with a bank for one client.

One of the points Julian, Fiona and Wayne all made was to allow plenty of time to set up the arrangement – they suggested it takes 6 to 8 weeks for the banks to process an instalment warrant application. So keep that in mind if you’re planning to settle on a property!

For those of you unable to attend the seminars, we’ll be posting a video of the seminar on the Cleardocs website in the coming weeks. In the meantime, you can find more information on SMSF borrowing in our previous blog posts, and ClearLaw articles written by our lawyers at Maddocks.

It was great to meet some of our customers face to face at the seminars after talking to so many of you on our helpline. Seminars are also a great way for us to keep you informed about products and issues that are relevant to you.

If you have any questions about SMSF borrowing, or about any of our other products, let us know in the comments section below, and we’ll get back to you. We’d also love to hear about any ideas you might have for future seminar topics. Or, if you were at the Seminar, we’d love to know what you thought.

Instalment warrants – working with your bank

Lisa Galbraith, CEO

 

As an SMSF trustee, I've recently been discussing the SMSF borrowing possibilities with friends – what a spread of views there are.

Every day, the interest (and Cleardocs helpline calls) about borrowing through an SMSF are increasing. People seem more positive about their economic outlook — or maybe they're just trying to recover some of the lost value in their funds. Trustees want to learn and are keen to understand the rules and the pitfalls and "what does the bank need?"

In the current credit environment, the banks are even more focused on their bottom line, on keeping their risk profiles down, and on passing any risk they can to someone else. Combine this with the newness of borrowing in a super fund, and your bank could be sending you through some pretty confusing hoops with pretty "interesting" fees.

As SMSF trustees, we need to make sure that a loan that works for the bank — works for us too. The fact that a bank lets SMSF trustee(s) structure a loan a certain way, or borrow to buy a particular asset, does not mean that superannuation law allows that structure, or allows the trustee(s) to acquire that asset for the fund.

Here at Cleardocs, we see the banks caution in their internal processes – in particular their document requirements. Although SMSF law is federal and the banks are national, the approach the bank branches takes is far from consistent. Sometimes, for example, a branch in NSW requires different words in the documents than a branch from the same bank in Queensland. This must be adding to costs, delay, and frustration.

We are working to ease this pain for our customers by tailoring our documents for each specific bank. (We can do this only once a bank settles a national position.) But it is clear from the calls we get that the bank that sorts out its processes first will draw the crowd.

Next week, Cleardocs is hosting an SMSF borrowing breakfast seminar with our lawyers and representatives of some banks. (Look out for the video of the event on our site).

As a trustee, I am looking forward to getting some clarification around what the banks want and why they charge so much in fees!

 

 

Instalment Warrants, SMSF borrowing, what’s happening

Christopher Balmford, MD

I reckon it would be good to get a discussion going in the 'Cleardocs community' — that is among: Cleardocs, Maddocks, and the people who use Cleardocs — about 'instalment warrant arrangements' and SMSF borrowing: who is doing what and why? … the banks, … the regulators, … SMSF members, and their advisors.

We thought we'd kick things off with our first blog.

You can read what we already know about instalment warrant arrangements for SMSFs in this article — which has a link to an interactive graphic overview about how instalment warrant arrangements work: the asset's journey to the trustees, the documents involved, and some of the emerging issues

Rather than repeat that article as a blog, here are some questions to trigger discussion:

• What are SMSF trustees and their advisers experiencing and wondering?
  


• Do you have any information from the regulators that you can "share with the group"?
  


• How are the banks going with instalment warrants? … An accountant who uses Cleardocs asked us for an instalment warrant contact at a bank — he said dealing with his client's bank on instalment warrants was like being in a "vortex".
  

Also, what do you think about these thoughts?

1. Some banks want personal guarantees (though they are calling them indemnities) from SMSF trustee(s) (or members) … which could be seen to be somewhat counter to the 'limited recourse' nature of the loan.
   


2. What the ATO's views will be about instalment warrant arrangements, generally — and in particular, the implications of the requirement that the loan be 'commercial'. Also, if SMSF trustee(s) of a fund with members who are all in their 50s borrow to buy property over 30 years, then are they really doing so to fund their retirement? Some banks are allowing 30 year loans. How might the ATO respond to that?
   


3. The best sort of structures for instalment warrant arrangements:
   

• Who should be the trustee(s) of the Custodian Trust (also known as a 'Bare Trust')?
  


• Who should be the lender?
  


• Are SMSF trustee(s) put-off by the thought of extra entities? Or do they like to be able to see who owns what — rather than trying to think of themselves as 'in the capacity of this' and 'in the capacity of that'?
  

It's early days for SMSF borrowing and instalment warrant arrangements. Some things are becoming clearer, some issues are emerging.

We look forward to the discussion. Feel free to comment in the box below, or to email us at support@cleardocs.com

Instalment warrant arrangements article with interactive graphic overview

Other topics? Feel free to suggest other topics on which you'd like the Cleardocs community to blog.