What brokers need to know about SMSF lending

Data from the Australian Taxation Office shows more than one million Australians are part of an SMSF, and thousands have purchased property within their fund.

Over the last few years, the amount of funds borrowed using limited borrowing recourse arrangements (LRBAs) has climbed dramatically – rising from $497 million in June 2009 to $8.7 billion in June 2014.

But while the amount of people managing their own super fund and purchasing property through it continues to grow, the decision to acquire property through an SMSF is one that requires careful consideration.

Furthermore, for advisers who are discussing SMSF property investment with their customers, there are some general guidelines they should follow.

Generally speaking, advisers who are recommending a real property investment should discuss the following with the investor:

• the needs and circumstances of the fund members (for example, their age and retirement needs) 
• if the recommendation involves an investment loan, and how long it will take for the investor to repay the loan 
• the investor’s ability to repay the loan if an unexpected event occurs (for example, the investor becomes unemployed for a period of time) 
• how the investor’s retirement will be funded by the real property investment (through the sale of property or through rental income) 
• how likely the property can be sold quickly (whether or not it is in a high-demand area) 
• what the investor will do if the property is not rented for a period
• the costs involved with purchasing property through an SMSF (stamp duty, exit fees, agents fees).

Of course, if the investment property is not the SMSF’s sole asset, advisers may be able to spend less time discussing these issues. It all comes down to a customer’s unique set of circumstances.

Once these issues have been discussed, and provided the fund members are happy to progress with the purchase of real estate, the next step is to determine a suitable LVR.

As a general rule of thumb, lenders are prepared to lend to an LVR of 80 per cent of the property. This is not a guide of suitability for SMSFs, but simply a lender’s perspective of credit risk and likelihood of debt recovery.

Each SMSF is unique and requires a separate analysis. Each fund’s capacity to borrow will be influenced by a number of determining factors including (but not limited to) the dollar size of the SMSF, the fund’s cash flow from assets as well as the fund’s operating expenses, the predicted cash flow from the property, and whether or not there is a need to hold cash reserves or have a diversified asset allocation.

Smaller funds will have a reduced capacity for leverage, as they will not want to be too reliant on the use of member concessional contributions to support any negative cash flow.

At Mortgage Choice, we require our advisers to draw up a cash-flow table that includes the income that the property will generate in rent as well as any outgoing costs that the property will incur, including loan interest costs, loan capital repayments, member insurance costs and general property costs. In addition, we require our advisers to provide a second cash-flow forecast that incorporates a two per cent stress test for loan servicing.

By doing this, our advisers help a customer/ fund members understand if real property purchase is an appropriate strategy, given the goals and objectives of the fund.

Tania Milnes, General Manager Mortgage Choice Financial Planning