The number of SMSFs borrowing to invest in property is growing each year. While these loans can be more complex, they open up multiple referral streams for ambitious brokers
The amount held currently in Australia’s superannuation system is set to double over the next five years, from $2 trillion to $4 trillion by 2020. Meanwhile, a rising proportion of Australians are opting for ‘DIY super’ – self-managed superfunds (SMSFs) – and the following ATO figures reveal a burgeoning opportunity for brokers.
In 2008, the total number of SMSFs was 376,000; by 2012, the sector had grown to 476,000 funds. More importantly, in 2008 only 4,100 SMSFs borrowed to invest in property; by 2012, that figure had swelled by 44 per cent to 17,600.
The value of total borrowings, however, is even more exceptional. The ATO now estimates assets held under limited recourse borrowing arrangements (LRBAs) have grown to $8.7 billion as at June 2014.
According to Ballast chief executive Frank Paratore, SMSF lending is another string that brokers should add to their bow.
“The SMSF market is already popular and certainly more widely discussed than it has previously been,” Mr Paratore says.
“It’s more about the relationship than the transaction. It is more of a customer-for-life type of mentality.”
Writing an SMSF loan is poles apart from writing your standard vanilla home loan.
For a start, the transaction involves greater complexity. Not necessarily the actual financing, although that can be difficult – particularly if you are looking at a self-employed borrower, says Ballast SMSF finance specialist Ed Welch.
“It is really the legal side,” he explains. “That changes from state to state. At Ballast, where we are operating nationwide, a lot of the legislation around purchase has very different legal requirements.
“Certainly, to specialise and be on top of it on a day-to-day basis is beneficial.
“The other thing for us is to have that one-stop-shop arrangement where you’ve got the accounting, the legal, and the financial planning under the same roof.”
For brokers who don’t have this benefit, building a solid team of professionals is essential.
Your professional network
The MFAA has been pushing diversification into SMSF lending in recent months and has designed a four-module course for its members.
The course is being run by Peter Dunworth, director of Super Fund Pro, a company that helps financial planners, accountants and mortgage brokers maximise opportunities in the SMSF space.
“The real change in the SMSF space has been that credit policy dictates what is required from the SMSFs,” Mr Dunworth told The Adviser.
“All of a sudden there is the potential that credit policy actually affects the advice that your accountant, financial planner and solicitor are actually giving to SMSF trustees.
“There are so many SMSFs being set up purely to borrow money that these other advisers need to understand the potential impact that credit policies could have on their clients.”
Brokers who are willing to write SMSF loans will undoubtedly form closer relationships with their referral partners. Finance Made Easy’s Tony Bice has been writing SMSF loans for a number of years and has two accountant referral partners who specialise in the space.
“I’ve noticed that the volume of referred business that I get from them has tripled as a result of them being comfortable with the fact that I can write these loans for their clients,” Mr Bice says.
“I’m now getting the accountant’s risk business and any other referrals over and above SMSFs.”
Brokers therefore need to be working with an accountant, financial planner and solicitor on SMSF deals. They will also need to have an understanding of SMSFs that is broader than just lending.
Brokers don’t need an RG146 qualification in financial planning to write SMSF loans. However, depending on the level of complexity that surrounds the structure, this type of loan may not be suitable for every broker, says Ballast’s Frank Paratore.
“It is more about gaining an understanding and that education piece,” Mr Paratore says.
“A brand new broker in the market would struggle with the SMSF and understanding the relationship side of it, as opposed to a more mature broker with a deeper level of understanding,” he says.
The MFAA’s course gives a broader understanding of SMSF lending and is designed to give brokers an awareness of how important it is to have a team of professionals around them.
More importantly, it gives brokers an understanding of which professionals can solve which problems in the transaction.
As The Adviser went to press, however, David Murray handed down the final report of the Financial System Inquiry (FSI), recommending that borrowing within SMSFs be scrapped. While it is uncertain whether this proposal will be implemented, brokers are now left hanging on the decision.
As a new revenue stream, SMSF lending is one of the fast growing areas that brokers can tap into.
But if it’s going to be scrapped, well, there’s not much point in wasting your time on it, is there? So what’s to become of the brokers who have invested time, money and effort educating themselves? Are the efforts of the MFAA, aggregation groups and others also going to be in vain?
Next month, we ask industry leaders: is this the end of SMSF lending?
FSI update: Murray proposes changes to SMSF borrowing
The much-anticipated final report from David Murray’s Financial System Inquiry (FSI) has urged the government to prohibit certain SMSF borrowing arrangements.
The panel has recommended a removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements (LRBAs) by superannuation funds.
“Government should restore the general prohibition on direct borrowing by superannuation funds by removing section 67A of the SIS Act on a prospective basis,” the report stated.
“This section allows superannuation funds to borrow directly using limited recourse borrowing arrangements.”
However, the report stated the exception of temporary borrowing by superannuation funds for short-term liquidity management purposes should remain.
While the FSI acknowledged the level of borrowing is currently relatively small, the report suggested that if direct borrowing by funds continues at current growth rates, it could pose a risk to the financial system.
The report stated this recommendation seeks to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly.
The report noted that lenders can charge higher interest rates because of the higher risks associated with limited recourse lending, and “frequently” require personal guarantees from trustees.
It also pointed to the likelihood of borrowing to concentrate the asset mix of the fund, thereby reducing its diversification and increasing its risk exposure.
“Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system,” the report stated.
“Borrowing, even with LRBAs, magnifies the gains and losses from fluctuations in the prices of assets held in funds, and increases the probability of large losses within a fund.
“In a scenario where there has been a significant reduction in the valuation of an asset that was purchased using a loan, trustees are likely to sell other assets of the fund to repay a lender, particularly if a personal guarantee is involved.
“As a result, LRBAs are generally unlikely to be effective in limiting losses on one asset from flowing through to other assets, either inside or outside the fund.”
If implemented, Mr Murray’s recommendation will have serious implications for Australia’s third-party channel, given the widespread distribution of SMSF loans by mortgage brokers.
Speaking to The Adviser, Super Fund Pro director Peter Dunworth – who runs the SMSF course on behalf of the MFAA – did not expect the FSI to make changes to SMSF borrowing arrangements.
“I just don’t think the FSI is even on brokers’ radars given that SMSF lending doesn’t even account for 10 per cent of the market yet,” Mr Dunworth said.
“The lenders have not lost any money on an LRBA transaction – the lending is actually very conservative.
“I’ll be curious to see what Murray’s research says because if he actually digs deeper and looks at the credit policy of SMSF lending versus traditional residential or commercial lending, he will find that SMSF lending is far more conservative, it has lower LVRs, higher serviceability standards and higher interest rates.”
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