Are you considering borrowing against your super?
What does borrowing against your super mean and how does it work?
If you want to borrow against your super, it means that you want to use your super as security for a loan.
You are effectively saying to a bank or lender that they can have your super if you are unable to repay your loan.
You might be familiar with borrowing against other investments.
Most commonly, people borrow against real property.
But you can also borrow against share portfolios, managed funds, and other investments.
So, can you borrow against your super?
Can I Borrow Against My Super?
A special thing about superannuation is that your super savings are generally protected from creditors.
Superannuation is classified as a protected asset.
This means that, no matter how much is owed to a creditor, they cannot access your super.
There are a few standard requirements that need to be met for this to be true, but in the large majority of cases, super is a protected asset.
Even if you declare yourself bankrupt, your super will be safe.
So what’s this got to do with borrowing against your super?
Let’s consider some circumstances as to when you might want to borrow against your super and whether or not it is possible.
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Can I Borrow Against My Super To Buy a House?
When you buy a house, you generally borrow against the house you are purchasing.
You are generally not able to borrow the total purchase price of the house, so a deposit is paid and the remainder is borrowed.
The maximum borrowing rate (LVR) against a house or home is 80-90%.
For example, if you wanted to buy a property for $500,000, a deposit of $100,000 and borrowings $400,000 would usually be possible.
So, if you can borrow against the property itself, why do you want to borrow against your super to buy a house?
Were you actually wondering whether you could use your super as the deposit for the house?
If so, the answer is generally no, unless you have met the superannuation definition of retirement.
If you have satisfied the definition of retirement, you can withdraw the funds you need.
What about borrowing against your super to buy a house and not using the property as collateral?
Again, the answer is probably no.
Given that super is a protected asset and cannot be accessed by creditors, do you think a lender would lend you money if they have absolutely no recourse on the funds being used as collateral?
Probably not.
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Can I Use My Super as Security for a Loan?
As mentioned above, you are unlikely to find a lender who will let you use your super as security for a loan.
The reason for this is because superannuation is protected non-divisible property.
This means that the bank or lender would be unable to access your super in the event that you were to default on the loan, or needed to repay the loan.
Withdrawing Super To Pay Debt
Withdrawing super to pay debt is a common strategy.
Many retirees will access their super as a lump sum to repay debt, or as an income stream to assist with loan repayments.
In order to withdraw your super to pay debt, you generally need to have met a superannuation condition of release.
Specifically, you will need to have satisfied the superannuation definition of retirement.
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You need to keep in mind that, once withdrawals are made from superannuation, the amount withdrawn is no longer a protected asset.
You might be wondering whether you should withdraw you super to pay off debt.
This is a common question.
Whether you should withdraw super to pay debt or not depends on what you are trying to achieve.
If you simply want to be debt free, then using your super to repay debt can help achieve that.
If you want to know whether it is financially beneficial, you can usually determine this using simple maths.
Are your super savings expected to produce an after-tax return greater than the interest rate on the loan?
For example, if you have a $100,000 loan at 5% p.a. interest and are considering paying it all off using super, you might consider:
- Will my super provide earnings in excess of 5% p.a. after tax?
- Given that paying off some or all the debt provides a guaranteed effective return of 5% on the amount paid, how much risk am I taking on by trying to achieve a higher return within super?
- Are there other factors as to why it would be better keeping funds in super?
- How would paying off debt affect any social security entitlements?
These are just some questions that can help you determine if you should withdraw your super to pay debt.
Limited Recourse Borrowing Arrangements
Borrowing against your super is possible within a self managed superannuation fund (SMSF).
But the asset purchased needs to be owned within the SMSF.
In this instance, a SMSF must borrow under a limited recourse borrowing arrangement (LRBA).
Specifically, an asset or property is purchased and used as security for the loan.
No other assets within the SMSF can be used by the lender as security.
The asset borrowed against is held within a separate trust until the loan is repaid in full.
All income from the asset must be paid into the SMSF and the SMSF is responsible for all loan repayments to the lender.
If the SMSF is unable to meet its loan repayment obligations, the lender’s rights are limited to the asset being borrowed against, held within the separate trust.
How Much Can You Borrow in Your Super Fund
The amount that can be borrowed within a SMSF is not limited.
The loan to value ratio (LVR) set by the lender with effectively limit the amount that can be borrowed by ensuring the LVR is not exceeded.
If the borrowing is from a related party, the ATO has provided guidance as to how to ensure the SMSF and the related party are dealing at an arm’s length.
These provisions include interest rates, terms of the loan, security, LVR and other factors.
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For instance, there is a maximum LVR allowed under the Safe Harbour rules, detailed under PCG 2016/5.
This LVR will determine how much you can borrow in your super fund as part of the Safe Harbour rules.
The Safe Harbour rules apply to real property and stock exchange listed shares or units.
The guidelines state a 70% LVR for real property and 50% LVR for stock exchange listed shares or units.
Exceeding these LVR guidelines will not necessarily deem a related party loan to be a non-arm’s length loan.
However, keeping within the guidelines’ LVR levels (together with all other Safe Harbour provisions) can ensure the loan is considered an arm’s length arrangement.
Can I Access My Super in Financial Hardship?
Yes, severe financial hardship is a superannuation condition of release.
If you satisfy the superannuation definition of financial hardship, you can access some of your super.
To meet the requirements of severe financial hardship, you need to have been in receipt of eligible government income support payments continuously for 26 weeks.
You also need to prove that you are unable to meet reasonable and immediate family living expenses.
If you meet these conditions, you can withdraw between $1,000 and $10,000 from your super account.
Only one withdrawal every 12-month period is permitted.
If you have reached your superannuation preservation age, plus 39 weeks, there is no limit on how much of your super can be cashed-in under the severe financial hardship provisions.
Can I Access My Super on Compassionate Grounds?
Compassionate grounds allows you to access your super in certain circumstances.
Certain types of compassionate grounds include:
- medical treatment costs for you or a dependant
- making payment on a loan to stop you from losing your house
- expenses associated with the death, funeral or burial of a dependant
- modifying your home or vehicle for the special needs of you or a dependant due to severe disability
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