17 Feb Is it a good or bad idea to borrow in your SMSF?
You may recall about a year ago (at the start of Covid), CBA produced a risk analysis with a worst case forecast of a fall in Australian houses prices of 30%.
This week the same bank forecast house prices to rise by 16% in the next 2 years across Australia. That is a big shift!
It just shows how hard it is to predict what is going to happen in the future and especially in such volatile times with some big economic levers being pulled in a way we have never seen before.
Times like these remind us that things don’t remain the same forever. One good example is how the market place for borrowing to buy an apartment in a SMSF has changed.
For years many people were advised to purchase an apartment in a SMSF and borrow using a limited recourse borrowing arrangement (LRBA) to help fund the purchase. In 2014 the financial systems enquiry lead by David Murray recommended LRBAs be banned to “prevent the unnecessary build up of risk”. While debt funding a SMSF apartment investment can amplify returns, it all exposes the fund members to greater financial risk.
In 2018 most major banks stopped LRBA to SMSF and the Financial Services Royal Commission in 2019 has done little to encourage them to put it back in the shop window. This left many people who purchased an apartment in this structure stranded, and forced them to find other loan arrangements when the apartment settled, or the original loan matured. This change diluted many of the financial drivers to purchase the apartment in this structure in the first place.
This week I noticed an article by Michael Roddan in AFR saying some non-bank lenders including Firstmac (Challenger) and Better Mortgage Management have re-entered the LRBA market with rates of around 4.75%. It says overall the sector has grown 10 fold in the last decade from $400m in 2010 to $50 billion last year. So it looks like LRBA loans are back… but for how long I wonder.
Changes in lending practices is just one example of how things can change throughout an apartment investment life cycle and highlights the importance of getting good property advice and being able to ride through tricky times and have options.