This is a true story on how wrong advice can avertedly kick you in the bum years later and cost you a small fortune to rectify.

 

And yep, it just happened to me…

 

 

It may feel like the story drags on… thats because it did and I want you all to feel the pain so that you never go through this.

The story starts with dud advice I had when I set my SMSF up 8 years ago. My accountant (at the time) set my fund up for myself and my girlfriend and made one catastrophic error… if only he were around now for me to vent my frustration to him…

The superannuation trust was established with myself and my girlfriend as the beneficiaries and trustees (known as individual trustees) and not a corporate trustee, Pty LTD.

Now you may say so what???

What’s the real difference?

The problem here for us is that should either one of us passed away then the fund must be closed and all assets sold. Lenders also have a reduced LVR (loan to value ratio) for personal trustees verse corporate trustees.

And for some investors, it allows for other family members to join or leave at any stage.

Not knowing any different, we went ahead and purchased my office within my fund. At the time this was the first SMSF commercial loan I had done and as SMSF loans were also new to all lenders, the loan was a nightmare to get approved and through to settlement. Add to that, that this was a commercial and we have Chaos. It also meant we had to literally take what the lenders offered us as a loan term along with interest rates. Commercial deals work very differently to residential where a lender can assess a deal then offer what they think is a fair rate and loan term for risk on the deal.

And being a SMSF commercial deal, it took a long time for the lender to assess and get through, leaving me very short on time to get the deal through to settlement.

Essentially I was bent over a barrel…

We had a three-year interest only period, which then reverted to a 7 year principle and interest loan with a high interest rate. In English the first three years were affordable and we made substantial principle payments on top of the interest to reduce the loan balance. But when the loan converted to principle and interest over a very short loan term, the loan repayments were $3,500 per month.

To put that figure into perspective, a residential loan repayment on a $300,000 loan would be $1,666… we were more than double that payment!

Since establishing the SMSF we learnt that a corporate structure as trustee was far more suitable to our circumstance.

So the time had come to re structure the fund along with re structure the loan.

I have been a mortgage broker for nearly 11 years now and this was the toughest deal to date… by far!

From lodgment to settlement it was slightly shy of ten months for this internal refinance to settle.

Now to bring everyone up to speed on the terminology, an internal refinance is where you keep the loan with the same lender but re structure and re negotiate the interest rate. These deal are generally the easiest as the existing lender already has the title deeds and knows everything about the deal from when they initially wrote the loan the first time…

Not the case here…

In recent times the legislation for SMSF (self managed superannuation fund) loans allowed for refinancing of loans dollar for dollar. So this meant you could shop around for a better deal but could not borrow any extra funds, the loan approved is the same amount as the existing balance.

Well it would appear that I was the first refinance for a commercial loan for a major lender in the country.

Gotta love being the guinea pig…

So we started with the process of incorporating a corporate trustee in place of ourselves. This process alone took around a month. From there we lodged the loan and this was where the headaches started.

Even though the loan serviced with our super contributions and rent the fund received, they insisted that we supply our personal financials. Now I don’t need to tell you how big my loan applications are. It was literally a War & Peace novel.

As the paperwork was over 8 inches thick, I felt sorry for the assessor who was diagnosing this puzzle. And yes weeks went by before they came back asking for a document here and a document there… each time we supplied the paperwork they put our loan back in the never ending queue. They were really going over the top in what they were asking for.

Then we started with the fund wording in the Trust Deeds, which they were not happy with. Three times we had to back to the solicitor. On one request we had to change one word on one page, as they were not happy with it. Again 2 months passes…

We then received the loan paperwork 8 months after submitting which was 6 inches thick. We were required to have the paperwork signed with a solicitor. They needed a week to read over the paperwork so they could explain it to us correctly.

To quote their words “ these loan contracts are the most detailed loan documents I have ever seen”… big call from a solicitor!

After this it simply got frustrating, they wanted a new lease… so it’s my company that leases the office from my super fund. Now they already have a lease on the file that was submitted with the first application but this was not acceptable now. But to make it worse they did not ask for this whilst they wanted everything whilst assessing, they dragged it on for another month.

Now to try and make sense of this, they required a specific type of commercial lease to be signed by both the SMSF and my company so that “could” be lodged with the bond board… but it didn’t need to be lodged.

Somebody help me here… they want a signed lease that can be lodged but don’t need it lodged?

So we obliged… and again three times they came back to me with some adjustments in wording they required.

And yes each time the lenders solicitor spent a week or so to read a few adjusted words.

To end this nightmare, the loan finally settled but the interest rate was wrong which they had to fix a few weeks later.

So the moral of the story is that getting good advice is priceless. This process cost us over $8,000 in solicitor and lender fees. Not to mention the hundreds of headaches and endless hours I spent on this deal…

A costly exercise considering that SMSF generally cost less than $5,000 to set up originally…

Please note that no advice was given in this Blog and that every applicant should seek his or her own independent legal and financial advice in relation to these funds. This is purely my story, applicable to my circumstances.