2018 was marked with a change in risk appetite from the banks, with the largest financial institutions in Australia pulling back drastically (if not withdrawing altogether) from lending to self-managed super funds. Annie Kane assesses the lending landscape for SMSFs.
When you look back at the year 2018, many in the financial services sector will remember it as the year of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The royal commission and, before it, the Productivity Commission’s review of competition in the Australian financial system dominated the headlines and gave way to a swathe of credit appetite changes among the banks. Among the changes that filtered through from the larger banks was a reduced appetite for self-managed super funds (SMSFs).
In October of this year, AMP became the last of the five major lenders to pull its offering of new business SMSF loans for residential property. AMP’s change was perhaps unsurprising, given that its chairman headed up the Financial System Inquiry of 2014 that (unsuccessfully) called for the ban of SMSF loans for property purchases.
The wealth giant’s decision followed on from a scathing report from ASIC about the quality of advice coming from financial planners in the SMSF space and came just months after the last of the big four banks pulled their equivalent products from the market.
The Commonwealth Bank of Australia ceased accepting new applications for its limited recourse SMSF loan in October, while Westpac announced in July that its whole banking group would be “streamlining” their product offerings and no longer offer self-managed super fund loans for new consumer or business lending. ANZ never really played in the space, while NAB stopped offering SMSF loans for residential purposes in 2015.
Speaking to The Adviser, the general manager of non-bank lender Mortgage Ezy, Joanna James, says that she believes the banks had pulled back from SMSF lending primarily due to the changes around the amount of investment lending that they are allowed to do, and the changes to capital requirements of investment loans — particularly, the increase of capital required for niche investment loans such as nonresidential, alt doc and SMSF loans going forward.
“Coupled with the fact that SMSF loans are more difficult loans to process and they take more time and expertise to process (often requiring specialist staff) and the fact that they do not fit with the automated credit scoring model that many banks are moving to, I think that when they’re looking at the exposure of investment loans generally, they’ve decided that SMSF loans require too much human resources and capital for the small percentage of overall increase of
business that they bring to the big banks,” Ms James says.
However, the GM suggests that SMSF loans were often better performing than their less complex counterparts, adding that this was the reason why several non-bank lenders had remained open to business.
“We still believe there is a need for it,” the Mortgage Ezy GM says.
“We actually believe that SMSF loans are a fantastic product. They tend to be lower loan-to-value ratios at around 60–70 per cent, so are very secure, and they are generally very well performing. Plus, they are long-term, stable loans, which don’t migrate every three years, on average, like other loans.”
Sean Murphy, SMSF lending specialist at mortgage brokerage My Mortgage Freedom, adds: “The worry I have is that if SMSF lending was to stop completely, the only victims would be those that have put deposits down on dwellings yet to be constructed.”
Looking at the size of the problem, Mr Murphy says: “This system was designed to help people retire, not send them broke. Super makes up 30 per cent of a $2.7 trillion sector; we can’t give up on this.”
Mr Murphy notes that thousands of trustees have purchased properties off the plan that may not be completed for two years or more, which means that their SMSF would have already committed a 10 per cent deposit (or, in some cases, a 20 per cent deposit) they risk losing if they can’t settle.
The broker therefore notes that there is a “huge opportunity” for non-banks to fill the void being left as the major banks exit the market.
Several non-banks seem to be of a similar mind, with La Trobe Financial and Thinktank both renewing promotion of their SMSF offerings in recent months. Thinktank director Per Amundsen has said that there are a number of well-known financial benefits of using SMSFs to acquire commercial premises, including tax
minimisation and wealth creation.
But on top of these, the commercial lender has suggested that market conditions are “ripe” for SMEs with SMSFs to purchase property.
Indeed, despite the reduced appetite for SMSF loans from the bank, the demand for SMSF loan products remains high. Figures from the Australian Taxation Office show that the volume of funds lent to SMSFs is ever increasing. As at the quarter ending March 2018, there were more than 595,840 SMSFs with more than $32.2 billion of limited recourse borrowing arrangements (LRBAs), $81.5 billion of assets for non-residential real property and $34.8 billion for residential real property — the highest numbers ever recorded.
It seems that Australians are increasingly keen to manage their own super funds and have the flexibility and independence to invest in the type of property they wish, manage the property themselves and be in more direct control of their long-term assets. According to Mortgage Ezy, brokers should therefore be looking to add SMSF loan writing to their suite of service offerings, if they don’t already.
“If you are a broker, you need to be able to write loans for your vanilla mums and dads as well as self-employed people with more complicated financials. You risk losing your best customers unless you are able to support them, if they want a self-managed super loan,” Ms James says.
“Some brokers don’t write this business because they believe it is a more complicated loan, and that may be the case when you’re first learning how to do it,” Ms James adds, “but when you understand how it is put together, the obligations and what the requirements are, it can easily be done.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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