Personal Guarantees

Exploding the Myths and Examining Your Options
 
 
Introduction
 
Without doubt the most contentious, and arguably the least understood, area of SMSF lending is the requirement of many lenders for members of the SMSF to grant a personal guarantee or indemnity in order for a loan to be made to the SMSF. 
 
As with all areas of SMSF lending it is our desire to assist our clients and their Advisers with a clear understanding of the lenders’ position and the factors that need to be considered by the Members of the SMSF. 
 
General Advice Warning:  Nothing on this page constitutes financial advice nor is it a specific recommendation. Your personal situation has not been taken into account and you must seek your own legal, financial and taxation advice in determining what loan structures are best for your unique circumstances and goals.
 
Definitions.  While many lenders are splitting hairs on the difference between granting a personal guarantee or an indemnity, and while the difference may be legally valid, and even legally significant, we will use "personal guarantee" to mean any guarantee, indemnity or promise made by a Member of the Fund without which "personal guarantee" the lender would not be willing to make the loan to the Fund.
 
Background
 
The amendments to the Superannuation Industry Supervision Act (SIS Act) that allow a SMSF to borrow to invest in property were enacted in September 2007.  They require very specific criteria to be met.  Among these criteria is the requirement that a lender must have ‘limited recourse’.  That is, the lender’s recourse in the event of default by the borrower (the SMSF) is:
 
  • Limited to the security property that is the subject of the loan, and
 
  • Must exclude any recourse to the other assets of the SMSF.
 
Banks being the conservative organisations that they are have traditionally ensured that they protect their capital with the best ‘collateral’ possible.  Thus the notion of limited recourse is anathema to them.  In desiring to strengthen their position, and given that they cannot require the SMSF to provide any further security, they have passed the responsibility on to the ultimate ‘beneficiaries’ of the loan by seeking personal guarantees from the Members of the SMSF.
 
When this form of lending first commenced there was significant conjecture about whether granting a Personal Guarantee was permissible and its effect on the compliance of the SMSF.
 
Can You Grant a Personal Guarantee?
 
While the position in September 2007 was unclear (when SIS s67(4)(a) was 1st introduced) it is now clearly permissible for Fund Members to grant Personal Guarantees. 
 
Amendments to s67(A) of the SIS Act received Royal Assent on 7th July 2010.  Among other clarifications, these amendments have confirmed the position on Personal Guarantees.  The effect is that:
 
  • Personal Guarantees are permissible, and
 
  • The Act now clearly states that any recourse by the Trustee or any other Third Party (including the Lender & Fund Members) is strictly limited to the asset that is mortgaged.
 
Despite this there are still many 'urban myths' that suggest a Member of a SMSF cannot grant a Personal Guarantee without making the fund non-complying, or alternatively that a Guarantee must always be given.
 
Not surprisingly - as soon as there was a legislative "green light" most Lenders chose to start routinely requiring Personal Guarantees.
 
However, just because you can - doesn't mean you should or that you necessarily have to.  Depending on your specific circumstances and needs - and indeed on the skill and acumen of your Broker - you may have options.
 
For more information regarding this issue, please Contact Us.
 
Considerations

We can assist you to establish a loan with or without a personal guarantee.  We have a number of lenders who either don’t require personal guarantees under certain parameters or who we can negotiate with to waive the requirement, subject to the specifics of your application and scenario.
 
SMSF Loans has been successful in negotiating a number of concessions from lenders under circumstances where existing customers of that same lender have been subjected to strict application of bank policy.
 
Please note:  Personal Guarantees are now definitely 'the norm'.  Therefore, in order for us to negotiate a loan without a guarantee on your behalf, one or more of the following factors will come into play:
 
  • The lender may offer a lower Loan to Value Ratio (LVR) in order to reduce their exposure and offer you the same rate, fees and charges.
 
  • You may be required to pay a slightly higher interest rate.  That is, higher than the rates that may be available if you were giving a personal guarantee.
 
  • You may pay a higher “Application Fee” or “Establishment Fee”.  Given that none of our lenders currently charge Lenders Mortgage Insurance (LMI) these increased establishment fees could be viewed as a “Credit Risk Fee” designed to offset the increased risk of a limited recourse loan.
 
  • You may achieve the same rate and the same LVR as you would in granting a personal guarantee, however the lender may apply a more strict servicing assessment.  This may impact the total borrowing your fund can undertake.
 
You will need to form your own opinion as to the cost-benefit analysis of whether or not to give a personal guarantee.
 
CLICK HERE - to provide details of your scenario so that a SMSF Loans Consultant can assist you or your Advisor with these considerations.
 
Advice 
 
SMSF Loans believes it is imperative that you take Financial and Tax advice prior to entering into a SMSF lending structure. 
We can assist you with Credit Advice and can discuss your lending options with regards to the effect of granting or not granting a Personal Guarantee.  However, we cannot advise or recommend whether you should or should not grant one.
 
Our Consultants are only too happy to discuss these considerations further with advisers in order to ensure that our mutual clients receive the best possible outcomes.
 
Please feel free to contact us for further assistance.