SMSF loans have stepped out of the limelight. Tighter credit and regulatory rumblings are making these loans increasingly difficult to deal with.
Australia’s love affair with residential property has been well documented. As has its ageing population. Put these two facts together and you have a winning formula for retirement… if only it was so simple.
According to the SMSF Association (SMSFA), over 1.1 million Australians now self-manage their own super. In the five years to 2014-15 the Australian Tax Office has seen the number of SMSFs grow by 27 per cent, with total assets valued at $590 billion.
The latest data from the ATO, released in late 2015, revealed that the proportion of SMSFs with borrowings continues to rise: from 2.3 per cent in 2010 to 6.7 per cent in 2014. Limited recourse borrowing arrangements (LRBAs), or SMSF loans, represent a portion of these total borrowings.
SMSF lending came under heavy fire a few years back when the Financial System Inquiry, chaired by former CBA chief executive David Murray, recommended banning SMSFs from borrowing to buy property. Needless to say, the federal government rejected the proposal. But a pang of fear rippled through the industry nonetheless and when APRA announced its three-pronged approach to rein in risky investor lending, banks viewed SMSF loans as the easiest lever to pull.
What’s on offer today looks very different from what was available just a few years ago; some banks no longer offer SMSF loans at all. Those that do have tightened up considerably.
Self-managing your super is seen as an alternative to going with the APRA-regulated funds. The deciding factor for many Australians is the freedom to choose their own investments, such as residential property. But APRA regulates the banks that provide SMSF loans. When banks tighten up on SMSF lending or pull the products completely, citing regulatory pressures, the impact is felt on SMSFs – which, again, were set up as an alternative to APRA-regulated funds.
The ATO is the key regulator of the SMSF space, responsible for ensuring compliance, while ASIC has been tasked with regulating SMSF auditors.
These two institutions have been responsible for promoting an idea that has fundamentally changed the SMSF lending space over the last 12 months. The idea can be boiled down to a single figure, actually: $200,000.
According to ASIC, the costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by APRA.
The ATO has made similar remarks.
Just remarks, mind you – no new rules have been made around this. But many of the SMSF loan providers have used the $200,000 figure as a guide when setting their credit policies. This, among other requirements, has curbed the enthusiasm for these complex mortgage products.
With broking often referred to as a ‘relationship business’, client relationship and database management is a core tenet of any broker’s day-to-day work. It is for this reason, says Jaime Vogel, chief information officer of AFG, that the aggregator has invested over $70 million in technology tools and platforms for its brokers, including the FLEX toolkit. This technology platform allows brokers to, among other things, “stay ahead of the game and well ahead of changing client behaviour and expectations”.
Many CRM systems not only provide a database management tool, but also offer a range of complementary features.
Mr Vogel says that the FLEX toolkit also includes both broker and client-facing smartphone and tablet apps, fact finds, referral engines, business intelligence tools, information portals, comprehensive marketing programs and cross sales plugins.
Similarly, software technology provider Rubik provides comprehensive CRM system software to aggregators and mortgage brokers.
According to Rubik’s general manager of product, mortgages and originations, Ben Newling, this not only allows brokers to input key customer details, but also provides calculations of how much their clients can borrow and a comparison of the credit parameters of all the major and non-major banks.
“Beyond that, it comes back to product selection, such as rates, fees and features of the major banks,” Mr Newling elaborates.
As a tool for client relationship management, Connective’s technology platform Mercury also encompasses a range of other complementary capabilities, as director Mark Haron points out.
“It provides business tools, comprehensive reporting and analytics of their business and broker performance and also commission management and recording,” he says.
Liberty Network Service’s Brendon O’Donnell says that with the help of technology, the aggregator has made significant progress in terms of its CRM system.
“In our network we understand who the customers are, we can talk to our customers quickly and with relevance, whereas in the past that was very difficult,” Mr O’Donnell says.
LVRs and the loss of lenders
Sydney-based broker Otto Dargan of Home Loans Experts says he hasn’t seen any major changes in demand from clients looking to purchase property through their SMSF. The only change, he says, has been in credit policy.
Not unlike the pricing and policy changes that lifted broker demand in the investor space, changes to SMSF loan policies have created increased demand for guidance and choice.
“More borrowers are shopping around to find if there is someone who can help them,” Mr Dargan says.
“Many banks reduced their maximum LVRs, introduced liquidity requirements or decided to withdraw their SMSF products,” he explains. “There’s also some niches that are difficult or impossible to service such as refinancing, cash out or construction.”
NAB was one of the first to pull out of SMSF lending completely in 2015. ANZ never really played in the space.
A quick look on Finder.com.au shows the following lenders still offer SMSF loans: Macquarie Bank, St. George, Bank SA, Bank of Melbourne, Homeloans, Westpac, AMP Bank, and Victorian Teachers Mutual Bank. Some non-bank lenders such as Liberty Financial still offer SMSF loans. Others like La Trobe Financial specialise in the space.
Some banks are a bit more flexible with the SMSF balance but will only do a 70 per cent lend.
Others will go to 80 per cent but the loan must be principal and interest (P&I). Then there are requirements around the security. For example, some lenders will only finance established dwellings (no new properties).
Others will, but only on a case-by-case basis. These policies are in constant flux.
Samantha Bright of Thrive Investment Finance specialised in SMSF lending and says the market has changed dramatically.
“Every angle has been affected. Your choice of lenders is reduced; your minimum balance requirements have changed, as have the LVR restrictions,” Ms Bright says.
“Not much has happened around that servicing piece. We’ve seen a lot of it happen in residential investor lending, but we haven’t seen that in SMSF because it’s already so heavily regulated. There is not much more they can take away.”
Minimum balances and liquidity test
A minimum balance requirement of $200,000 is standard policy for most lenders these days. In many ways, this has helped remove a lot of the property spruikers from the market. However, while it may have cleaned up the industry, Ms Bright says minimum balance requirements have had adverse consequences on certain segments of the market.
“Only recently I’ve noticed a whole group of people from a younger demographic, that millennial generation, who are being locked out,” she said.
“They’re really, really passionate about getting into the property market. They’re switched on about super. They’ve had contributions their whole working life so they have good balances. But at the moment they can’t get in because they don’t have enough. At the moment, they are falling under that $150,000 to $200,000 mark.”
The banks are now insisting on extra criteria in the form of a liquidity test. This means that the SMSF must hold liquid assets such as cash, shares and bonds of at least 10 per cent of total assets after settlement.
For some brokers, this extra hurdle is causing some deals to fall over. Sydney-based broker and financial planner Tony Bice says he writes the odd SMSF loan here and there but he doesn’t go looking for them.
Two recent deals he was putting together didn’t meet the lender’s liquidity test. Here he explains what a typical SMSF deal might look like in the current environment:
“If a client is buying a $500,000 investment property and they want to structure it inside their self-managed superfund, then the amount of cash that they’ve got to have in their bucket to put toward their deposit and their costs, is, in one bank’s case, 20 per cent plus the stamp duty costs.
“Over and above that, they have then got to have an extra 10 per cent of the value of the purchase price property left over as a fall back, in what they call a liquidity test.”
“A lot of the time, that means the client has got to have in excess of $150,000 or $160,000 if they want to buy an average size property, like a $500,000 purchase. They’ve got to have quite an extra bit of cash in their bucket.”
Upskill and find your niche
The simple fact for most brokers is that these loans are just too much work. Let’s face it – there is plenty of business out there without having to chase SMSF deals. But it would be foolish to ignore this space completely – particularly if it is in your target market.
“If you remove the context that we’re mortgage brokers and you just talk about a business offering services, I am a believer that every business has a target market,” Thrive Investment’s Ms Bright says.
“Whether you are selling fruit or home loans, your target market dictates what product you have. If I am a mortgage broker that does a lot of first home buyers and I am in that mortgage belt then maybe no, don’t do it, because you’ve got to do it all the time. It can’t be something you do once a year because you just won’t be up on the changes or what you need to do,” she says.
“But if you’re a broker that has that target market of the middle-aged customer who is investing, who does seek advice or would be open to getting financial advice and is a product that fits your target market, then absolutely look at doing it.”
Ms Bright has plenty of experience with SMSF lending having cut her teeth in the space during her time at NAB and MLC in 2007.
However, after moving into mortgage broking, she didn’t just rely on previous knowledge to get her through. She still did the MFAA’s introductory course on SMSF loans, followed by the advanced course. The Brisbane-based broker also put herself through an SMSF accounting course to gain a deeper understanding of what has now become her target market.
“If a broker is considering doing it and it is their target market and it is a product that aligns to who they’re wanting to do business with, they must do some accreditation,” she says.
“I can’t tell you how many times I have been approached on LinkedIn. People just ring me or email me and say ‘I am doing an SMSF loan, can you help me?’ And I think: if you don’t know what you’re doing you shouldn’t actually be doing it. Because this is someone’s life savings; this is the real deal.”
Lender spotlight: La Trobe Financial – Cory Bannister, vice president, chief lending officer
Q: A number of lenders have dropped out of the SMSF lending space or tightened their policies. What is La Trobe Financial’s current offering for SMSFs looking to purchase property?
Although there have been a number of changes in lender policy and appetite for SMSF loans recently, our policy for SMSF loans has remained unchanged. We offer finance for SMSFs up to 70 per cent of a property’s value for both residential and commercial property. We consider off-the-plan purchases and do not have defined minimum thresholds relating to superfund size. Serviceability is based on proven income from the SMSF, however it can also be supported by the beneficiaries.
Q: How has the market changed over the last 12 months?
Over the last 12 months we have seen lenders leave and re-enter the SMSF lending market. The ATO extended the 30 June 2016 deadline for SMSF trustees that have a related party loan under a limited recourse borrowing arrangement (LRBA) to 31 January 2017.
This was to ensure that the related party loan is on commercial terms (i.e. not financed by a related party or family member) or complies with the safe harbour guidelines. Those that didn’t comply, were required to wind down the fund or refinance with a commercial financier or lender and this is where La Trobe Financial has been able to assist.
Q: What sort of demand is La Trobe Financial seeing at the moment for SMSF loans?
We have experienced strong and steady demand for our SMSF product as one of a few lenders that has had an enduring and steady offering in this space. SMSF loans form circa 10 per cent of all loans originated and we continue to see an uplift in this space.
Q: How is La Trobe Financial working with brokers in this space?
We have purposely engineered this product, like all of our products, to be user friendly for all brokers, removing many of the barriers to entry that can often be attached with specialist products. Brokers do not need to separate accreditation and can use our standard forms and documents that they have been using for our other loan products.
Having an experienced team on the road combined with accessible credit staff in the office means we can assist brokers using a consultative approach from submission through to approval. Having direct access to the decision makers, results in a much smoother end-to-end process.
Q: What advice would you give to brokers looking to break into the SMSF lending space?
When meeting clients, brokers should not only look at the opportunity presented in front of them, but look for other potential opportunities in the future by understanding their long-term goals. Anticipating the client’s needs by “financing life at every stage” is something that we at La Trobe Financial believe in firmly and practice every day.
Diversification has been the industry buzzword for some time now and aligning with good referral sources such as accountants or financial planners ensures quality client leads but also the ability to provide solutions to clients and their extended families and friends. Of-course, partnering with a lender that is able to enable and realise such opportunities with the right lending product is key.
Q: How important is training and education for brokers when it comes to writing SMSF loans?
It is imperative. With the SMSF sector having emerged out of its infancy and coupled with the significant growth statistics reported by the ATO, it can be challenging as a broker to keep abreast of all the potential legislative changes being rolled out.
Especially, if the broker is catering to multiple market segments. That is why aligning with a market leader in SMSF lending such as La Trobe Financial is very important, as it offers a robust and thorough lending process with a reputable organisation.
Q: What is the accreditation process for brokers looking to write SMSF loans with La Trobe Financial?
The accreditation process is simple, it is automatic if the broker is accredited with one of our valued aggregator partners. That said, we encourage brokers unsure about how to write this product to contact their senior manager client partnerships or our credit team to arrange appropriate training.
Q: How does La Trobe Financial differ from the banks or other non-bank lenders offering these types of products?
It starts with removing many of the barriers to entry, and flows through to specific product niches such as not requiring a minimum fund balance, and like all of our products we assess each transaction on its merits and apply different thinking to seek alternative methods to provide solutions for the client.
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