Let’s take a look at SMSF loan offset accounts for investment property loans taken out by SMSFs, also known as limited recourse borrowing arrangements.
What is an offset account?
An offset account is a bank account linked to a mortgage. The account doesn’t pay interest, but the balance is subtracted from the amount owing on the mortgage, and interest is only calculated on the remaining balance. For example, if you have a $400,000 mortgage and a $100,000 balance in the offset account, interest is only calculated on $300,000.
How does an offset account impact the loan?
An offset account will reduce the time to pay off the mortgage. This is because, with each repayment, a larger portion of the regular payment is allocated to reduce the loan principal.
Benefits of an SMSF loan offset account
SMSF loans (also known as LRBAs – Limited Recourse Borrowing Arrangements) have many restrictions compared to regular investment loans.
For example, an SMSF loan cannot have a redraw facility (unless only used for repairs and maintenance), and equity that builds up in the SMSF property cannot be accessed as the loan is paid down.
An offset account for an SMSF loan allows surplus funds, such as cash from regular employer and personal contributions, to build up while reducing the interest calculated on the SMSF loan.
Money in the offset account can be withdrawn anytime and used for future investment within the SMSF. This could include investing in any other asset class or funding a deposit for another property under an LRBA structure.
Are SMSF loan offset accounts legal?
To comply with superannuation laws (specifically s67A of the Superannuation Industry (Supervision) Act 1993), the offset account must be a transactional account held with an Authorised Deposit-taking Institution (ADI) such as a bank or credit union. It should have its own BSB and account number.
Most major banks no longer offer SMSF loan products. Many specialist non-bank lenders now service the SMSF loan market but cannot accept customer deposits. Some non-bank lenders have formed relationships with credit unions or other ADIs to provide a legitimate offset account for SMSF borrowers.
In addition, to comply with superannuation laws, the SMSF loan agreement cannot allow the lender to have security over the offset account or any claim over the offset account in the event of default. The lender’s recourse must be limited to the property only. Also, lenders cannot use personal guarantees signed by the SMSF members to get around this restriction.
At the time of writing (March 2024), the ATO indicated they would review SMSF loan products with offset facilities to ensure they comply with the legislation.
What lenders currently offer SMSF loan offset accounts?
At the time of writing, the following non-bank lenders have SMSF loan products with an offset account:
- Granite
- GreenHouse
- Better Mortgage Management
- Mortgage Ezy
- WLTH
- Reduce Home Loans
- Homestar Finance
- Yard Home Loans
Please note the above list is not comprehensive and subject to change.
How to use an offset account with your SMSF
To get the most benefit from your SMSF loan offset account, consider the following:
- Move all excess cash from your SMSF savings or transactional account into the offset account, ensuring you leave enough money in your transactional account (CMA) to cover regular expenses such as fees, insurance premiums and taxes.
- Instruct your property manager to deposit rental income into the offset account.
- Nominate the offset account to be debited by your SMSF lender for the regular monthly loan repayments.
- Have your employer(s) pay contributions directly into the SMSF offset account or set up a recurring payment from your cash transactional account (CMA) to automatically move employer contributions across.
The overall goal is to maximise the offset account balance while ensuring enough funds are in your transaction account (CMA) to keep the SMSF running smoothly.
Should you choose an SMSF loan with an offset account?
SMSF loan products with offset accounts are popular with borrowers because of their flexibility.
However, a legitimate and complying SMSF loan offset account is not the only aspect of an SMSF loan that should be considered. SMSF borrowers should consider interest rates and other applicable fees when deciding if a loan product suits them.
DISCLAIMER: The information in this article is general only and cannot be considered personal financial advice. For guidance on SMSF lending products, seek advice from a licensed mortgage broker.
