A contentious area of SMSF Lending is the growing trend of SMSF lenders to obtain a personal guarantee for SMSF Loans. Our experience indicates that many brokers and SMSF Trustees lack the required understanding of the impact of the personal guarantee, and usually spot the personal guarantee too late when they are signing mortgage documents close to settlement date.
What is a personal guarantee?
A personal guarantee means that the SMSF member or third party provides the lender with additional assets as security for the loan. If the SMSF member fails to repay the loan, the SMSF lender has a right to recover those assets (limited to the property under the Limited Recourse Borrowing Arrangement (“LRBA”).
Can you grant a personal guarantee?
There is a myth in the Superannuation industry that SMSF Members cannot grant a personal guarantee. This is indeed a myth. Amendments to s67(A) of the SIS Act confirmed the position that personal guarantees are permissible, however any recourse is limited to the asset (i.e. property) being mortgaged. This is confirmed by the ATO as well as in ATO ID 2010/170. Before you grant a personal guarantee, it is advisable to seek specialist credit and taxation advice.
SMSF Loan considerations
It seems now a regular practice for lenders to seek a personal guarantee, with many if not all leading SMSF Lenders seeking a personal guarantee. Generally, a good broker will assist to negotiate a limitation of the personal guarantee depending on the Loan to Value (“LVR”) ratio and a number of other parameters including SMSF balance and Contributions to the fund.
Which lenders require a personal guarantee?
Not all lenders require a personal guarantee. Generally lenders will apply their discretion in seeking a personal guarantee. We can’t state that a lender will not seek a personal guarantee however its important you are aware of the personal guarantee and its impact on your personal situation.
What if I don’t Guarantee the loan?
In order to waive the personal guarantee, there may be an arm wrestle with the lender, this may include:
Pay a higher application fee
Reduce your LVR
Pay a higher interest rate
Greater servicing of the loan
These considerations will require specialist credit advice which your Broker will provide. This will also include Accounting and Tax Advice
In conclusion, recent changes to SIS confirmed that you can provide a personal guarantee on a SMSF Loan, and the growing trend is SMSF Lenders are seeking a personal guarantee. SMSF Lending is complex and it is important to seek professional credit advice to obtain the best structure and understand the implication of granting a personal guarantee.
Important Disclaimer: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal financial or credit advice – Redwood Advisory does not hold an Australian Credit License. Consider the appropriateness of the information in regards to your circumstances.