16 Feb Non-banks leverage up SMSF property after COVID-19
Author : Michael Roddan of AFR
Non-bank lenders are diving headfirst into controversial lending arrangements that allow self-managed super funds to leverage investment properties, after an exit from the sector by mainstream lenders and amid a powerful upswing in house prices following the COVID-19 crisis.
Two non-banks have this month launched new products to attract SMSF owners with so-called limited recourse borrowing arrangements (LRBAs), including challenger lender Firstmac and Brisbane-based Better Mortgage Management.
Newly built houses and apartments in Sydney, where prices are once again on the rise.
Loans for property investment through SMSFs are considered “limited recourse” because if the loan defaults, the bank can claw back only the specific asset bought with the loan, not the rest of the assets in a fund.
LRBAs have been recommended to be banned by government inquiries and by Australia’s top financial regulators due to the risks leveraged property investment pose to the superannuation system and to individual borrowers.
Despite the reputation issues and the coronavirus pandemic, LRBAs in the super system have surged in popularity, hitting $50 billion late last year – a more than 10-fold increase on the $400 million level recorded a decade ago and an 8.8 per cent jump over the last year.
While property prices were forecast to dive amid the harsh government lockdowns and ensuing recession last year, enormous fiscal and monetary stimulus has resulted in a housing market boom, with Commonwealth Bank economists on Monday predicting property prices will jump 16 per cent over the next two years.
Firstmac managing director Kim Cannon said the bank’s new “Residential SMSF” product would be a game changer in the “poorly serviced” segment of the market. The loans, which will offer a 4.75 per cent interest rate, will be “a compelling proposition for brokers”, he said.
Better Mortgage Management boss Murray Cowan said its LRBA loan, which offers a starting rate of 4.84 per cent and allows SMSF owners to access up to a $1.25 million line of credit, would be “a strong offering to this under-serviced sector”.
Firstmac CEO Kim Cannon said the bank’s new “Residential SMSF” product would be a game changer in the “poorly serviced” segment of the market. Louise Kennerley
David Murray’s 2014 financial system inquiry recommended banning limited recourse borrowing arrangements to “prevent the unnecessary build-up of risk”. In its submission to the inquiry, the prudential regulator APRA said it had “long had reservations about extending the ability of superannuation funds to borrow” as “additional direct leverage may amplify returns but exposes superannuation fund members to greater financial risks”. The proposal was the only recommendation the government did not adopt.
Property now much more attractive
Melbourne University professor Kevin Davis, a member of the financial system inquiry panel, said non-banks would be drawn in to offering the product due to the vacated field left by large lenders who don’t offer the product any more, while SMSF owners would be compelled to the loans thanks to record-low interest rates and booming house prices.
“There will be lots of people with SMSFs who look at property now as a much more attractive asset given how low official interest rates are,” Mr Davis said.
“Investors will be moving into higher-risk activities and leveraged investments such as these loans, which increase both the risk and potential return,” he said.
“It’s a mixture, I guess, of people looking for higher-returning investments, being able to lever them, and then on top of that, to exploit the tax advantages that are available through investments in both housing and super,” Mr Davis said.
In 2019, Macquarie Bank, Commonwealth Bank and Westpac slammed the door shut on SMSF lending, ending any sales channel for limited recourse borrowing arrangements from a mainstream lender.
The decision was made as Labor went to the 2019 election with a promise to ban LBRAs.
However, that year the Morrison government snubbed a request from the powerful Council of Financial Regulators to ban property investment through self-managed super funds, following a three-year review of the market by the regulators and the Australian Taxation Office.
In its review to the government, the Council of Financial Regulators raised concerns that many low-balance SMSF owners had most of their savings tied up in a single leveraged property.
Investigations by the Australian Securities and Investments Commission also found LRBAs were often sold alongside questionable financial advice, with advice to set up an LRBA unlawful 91 per cent of the time.
The banking royal commission exposed a number of one-stop-shop advisors hawking SMSFs and borrowing arrangements for high fees, even when it would not be in the best interests of members to enter the schemes.
Credits to Michael Roddan and AFR for the article