I have a situation which may become more common with the recent activity in "off the plan" property purchases and latest substantial increase in property values.
The case to hand is:
2 years ago an SMSF executed a property Contract for Purchase with a purchase price of $450,000 and it has approval of an LRBA of $360,000, ie. 80% borrowing. The property is now valued at $700,000. On the increased value, the Bank is now able/willing to increase the Loan (based on same LVR of 80%) to $560,000. Obviously, the increase in the amount borrowed will result in a exess of Funds, which the Trustee intends to utilise for the purchase of other assets ie. shares or another property. My feeling is that as the entire LRBA will not be fully utilied for the original asset as intended, there is a breech however not sure of the SIS section applying to the breech. Another option the lending Bank is willing to entertain would be to simply increase the borrowing to a level which would result in the entire LRBA being used on the purchase without any equity by the Fund. The LVR would be 100% of the contracted purchhase price but 64% based on the increased value of the property under purchase.
The Accountant for the Fund has approached me for my advice but I'm not 100% comfortable with either of the options, but unsure what Section would be breeached.
Your guidance is apprecaited.