Regulators raise concerns about rise in non-bank SMSF lending

Regulators raise concerns about rise in non-bank SMSF lending

While the Council of Financial Regulators has found that there is no need for a ban on SMSF borrowing, it has identified the rise of non-bank SMSF lending and one-stop shops as some potential risks in this area.

A report by the Council of Financial Regulators (CFR) and the ATO has found that limited recourse borrowing arrangements held by SMSFs are unlikely to pose a systemic risk to the financial system at this time. You can access the report here.

The report was commissioned by the government as part of its response to the Financial System Inquiry which called for a ban on SMSF borrowing back in 2014.

The Council of Financial Regulators is a non-statutory body comprising the Reserve Bank of Australia, APRA, ASIC and the Australian Treasury.

The report handed down did not recommend removing the ability for SMSFs to borrow, but it did recommend further monitoring to track the future growth of leverage and risks within the SMSF environment.


“A further report to government in three years would provide further analysis of the ATO’s enhanced SAR data collection and the impact of major banks’ withdrawing from lending to SMSFs,” the report stated.

While the report did not call for a ban on LRBAs, it did flag some concerning trends in the area of SMSF lending including some of the loan market changes stemming from APRA regulatory changes.

“The subsequent withdrawal of most major banks from SMSF lending is likely to change market conditions further, including through increased lending by non-ADI lenders and related parties,” the report stated.

“This sector does not have the same prudential scrutiny as larger ADIs. This further adds to concern around highly leveraged low diversified funds.”

With Macquarie announcing that it would exit the SMSF loans space for residential property in the past week, there are now no major lenders left in the SMSF lending space for residential property.

 

Report from the Council of Financial Regulators - https://www.cfr.gov.au/publications...k-in-the-superannuation-system/pdf/report.pdf

 

Yeah well what were they expecting when all major lenders pulled out of the SMSF space?

 

If they are concerned, they should cap the rates/fees charged by these non-banks - that would never happen of course.

 

...there are now no major lenders left in the SMSF lending space for residential property

Yes, this was my broker's prediction some time ago, that LRBAs will be a limited window of opportunity, only for a short while... Luckily our family and friends we were fortunate to be around those times and take those opportunities as it seems now they are all gone for any investors!

 

No major lender doesn't mean no lenders. LaTrobe, Liberty and gang are still going strong. What worries me though is the lack of competition means license to put rates up and many small lenders don't have fixed rate options.

This is from 6 months ago. Majors gone but many small players kicking around. ALP's ban would be the final straw on LRBAs. There is already hush-hush talk about investing through geared unit trusts while having "independent control", not for everyone though.

 

I agree with you, and makes me think what happens with existing lenders... will they hike up their fees? We are commercially with St George but nearly paid off those loans but a higher interest rate above 7%, glad though mostly paid off with cash sitting in offset accounts.
Additionally we then lent the funds ourselves (via CBA to us) and created and modeled on St George commercial lending terms our LRBAs. We could do that.. so our LVRs varied plus we were able to still have IO option for 5 years then pay off P&I in 10 years. The issue there is that we must pay 5.8% interest rate out yet we pay the CBA around 4%, so more money out of SMSF to ourselves.
I realize LRBAs are not for everyone but very preferential option for us as currently we are only geared around 22% in SMSF and still in accumulation phase.
The plan is for another 8-10 years when may be we may decide then to access SMSF funds in pension phase? Who knows when we will need them......?

 

When you say you lent to your SMSF via CBA - how was it structured? Are they personal funds that CBA used as security to lend to SMSF? Why not a related party loan?

 

Yes, yes, yes... related party loan, whether we give our cash, or funds we lend ourselves from CBA is irrelevant as long as we adhere to related party borrowing arrangements rules set by government. We drew equity from our PPOR (was fully paid of with lots of equity), we then split to many loans for our investment purposes some for SMSF lending some for trust lending some for personal lending. Our lawyer created LRBAs for us, so as far as CBA is concerned we pay 4.34% IO till 2022 then P&I with around 26 years loan term to them.
However, our loan arrangements we modified after government introduced related party loan rules....so we will pay those loans fully within 11 years or so (around 1 year 9 months still IO and then 10 years P&I). Of course we have a choice to pay them off sooner if we wished and have the funds, we have options to sell some other IPs, sell IPOs and just pay off in time from current Concessional Contribution and current SMSF investments we generate. However, why would be paid them off and transfer owneship to SMSF and pay more land tax then?
You see many years back we were generating 6 digit income per year form SMSF, still in accumulation phase, unable to access the funds until we meet the age criteria for pension phase (we have not met this criteria yet). So why not increase our holdings with some leverage and take advantage of one more cycle...
We have choices and that's the wonderful thing, hence why I say it's not for everyone, especially if they have low funds in SMSF and lack diversity too. We run our SMSF since 1995!

 

more of LRBAs...
SMSFA suggests better LRBA risk reduction solution - SMS Magazine

 

No personal guarantees is a good thing but the LVRs tend to be sub-50% in the current lending climate.

One stop shops that sell their own crap to unsuspecting SMSFs should be banned right away.

 

It needs to evaluated case by case, originally we had 80% LVR with no personal guarantees - had the cash in the bank though to buy outright hence used LRBAs with maximum borrowing capacity and with offsets, then used the cash to buy another IP with cash outright!
The key as they mention is portfolio diversity and higher balances - hence not for all!