Personal Guarantee

Are you thinking of using your Self Managed Super Fund (SMSF) to take out a loan?

Loans for Self Managed Super Funds are slightly more complex than standard lending arrangements and often the banks are exposed to a higher degree of risk.

For this reason, they may request a personal guarantee. Please read on to find out if you need one.

SMSF lending structure

Loans to Self Managed Super Funds are of a ‘limited recourse’ nature, meaning that in the event of default, the lenders ability to recover funds is limited to the property that is being used as security for the loan.

This means that the lender has no recourse to any other assets held by the SMSF.

Because of this, some lenders seek to mitigate their risk by requesting a personal guarantee from the members of the fund. The guarantee provides the bank additional security, in the event of default.

Whether you will be required to provide one depends on your situation and when you entered into the arrangement.

What is a personal guarantee?

With a personal guarantee, a third party or member provides the lender with additional assets as security for the loan.

If the SMSF fails to repay the loan, the lender has a right to recover those assets.

The guarantee can be either limited or unlimited. Where it is unlimited, the other assets of the SMSF will be exposed to a significant amount of risk.

It is advisable to seek professional legal and financial advice before entering into a personal guarantee.

Which lenders require a personal guarantee?

Not all banks require a personal guarantee. Generally the lenders will apply their discretion, after considering all aspects of your situation.

Our expert mortgage brokers know which lenders will request a personal guarantee, or which major banks can consider your individual circumstances and may waive this requirement.

We can assess your situation and inform you of the lender that is best suited for your needs.

Why do some lenders need a personal guarantee?

A personal guarantee protects the lender from the risks associated with the ‘limited recourse’ borrowing arrangement.

If the borrower defaults, the lender may not be able to recover the full sum of the loan, simply by acquiring and selling the security that is the subject of the loan.

As a result of the risk, banks shield themselves by requiring SMSF members to enter into a personal guarantee. That way they will be able to access other assets, to help pay back the debt owed.

Want to find out whether you will be required to give a personal guarantee? Please contact us today to discuss your situation with one of our expert mortgage brokers.

What happens if I don’t guarantee the loan?

If the lender does not ask for you to personally guarantee the loan, there may be other implications for your SMSF as a borrower.

Some lenders will limit the amount that you are eligible to borrow, thereby reducing the Loan to Value Ratio (LVR) of your loan.

Others may impose a higher interest rate than those offered if you were to sign a personal guarantee.

The application and establishment fees associated with the loan may also be greater. This is to offset the risk that your loan poses.

For this reason, some people are more inclined to get a personal guarantee, as the bank may apply a more flexible approach in assessing your serviceability.

What about Lenders Mortgage Insurance?

Most lenders do not charge Lenders Mortgage Insurance (LMI) for SMSF trust loans.

Whilst this may sound great, it means that some banks will try and add on extra credit risk fees, to further protect them from any losses they may incur.

However, some banks have low fees and can offer you competitive SMSF loan products, even with no personal guarantee.

Get the right financial advice!

A SMSF lending structure is quite complex!

For this reason, we recommend that you contact one of our experts who can offer you sound financial and taxation advice and help you determine what product will best suit your needs.

Please enquire online today and one of our mortgage brokers will call you to discuss your situation.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.