SMSF's will no longer be able to borrow to invest in property?

For those already with SMSF loans the exodus poses a major liquidity issue. Forced sales could result. That was always a risk when SMSF lending started in 2007 and the loan relied on a assumption that portability could always occur. Well thats looking dubious. . Slowly as the music stops playing the musical chairs could see some land on their bum.

I question why they are pulling out ? Bank have always priced products based on cost. I suspect this isnt a cost issue as they could always up rates but they arent doing that (well not more than usual). It reeks of risk management. They cant even just increase rates.

I reckon the credit multiplier effect on balance sheets for these non-recourse loans are about to go bananas and when rates jump banks may even seek to call in existing loans aggressively. The margin to cater for the true cost may become a 5% - 8% margin above base rates....All because the loans are non-recourse. I dont know if there is a fix. Its like SMSF loans have become like a pawnbroker product. And the bank doesnt even want it. So I question if some of these loans could get called up. Banks wont want to be holding them.

In the 1990s when I was with a major bank in Treasury we saw this spike occur in a brief period and a (I wont name them) major bank had to bail out of a specific financial product just like this. The market suddenly priced a (say) 10% product rate at 20% and soon nobody would touch it with a barge pole. All lenders closed their books and the product disappeared overnight. And blew up a few people in the course of it.

 

I try to discourage any individual in regards to buying off the plan, for many reasons, one of those is SMSF lending, if a property is settling post mid-2019, you better have equity to consider a related party loan as with Labor coming in i'd say SMSF borrowing may be banned late 2019. In the meantime there are plenty of options to consider.

Macquarie is still going for those > $250k Net assets and La trobe is just killing it and have been for a while. The difference with La Trobe is that the App fee is generally higher than a normal lender, it can be 1-1.5% which includes the brokers upfront.

@TerryW is right re the future cost of funding, it happens last year with SMSF loans going up 100 basis points based on the APRA review. Now its follow the leader.

Still players in a niche market.

For brokers, its not all doom and gloom, you will have 30 years left on a loan that the client cannot refi.

Time for diligence to be performed by the advisor, broker, and importantly the end client.

BTW don't care for AMP they did not have a major slice of the market
Cheers Ivan

 

Say I have a SMSF loan with one of the banks.

Can I personally lend to the SMSF (at arms length, market rates) to pay off this loan, or does this fall under related party lending?

Just thinking about options if banks start to aggressively reprice their SMSF portfolios.

 

Related party Loans are still possible but seek legal advice before trying this.

 

Related party loans are really simple and are the way of the future. The clear guide is SMSFR2016/5 which has a table with the terms. Its not as complex as people think but then again I do this stuff every day. Follow the table in the ruling and ensure you have a monthly set up for the loan repayment.

Here is an example.

I have a SMSF loan with XXX bank, the pricks increased their variable rate to 19.9% - how dare they! So the loan is $267k and now i am paying this stupid interest rate.

how do we resolve this?

Simple, Jack and Jill have $2m in equity in offset or cash. They have been very very diligent. Simply they can discharge the loan with "cash" or a related party loan agreement for sat $267k and pay yourself interest per the ruling. Follow the table.....ensure your loan is documented and executed. If you are a novice, be sure that you seek advice.

This is the future.

Of course, the above, is general, not financial advice....thats pretty clear.

Cheers Ivan

 

Thanks Ivan, very helpful! Exactly what I was after, will check this ruling out.

 

Where available, a 3 to 5 year fix perhaps?

 

If ALP bans LRBA, wouldn't that rule out related party loans as well? Aren't they an LRBA loan as well?

Probably just leaves geared unit trusts with independent control where companies might offer "independent" management dictated by majority share holders (multiple SMSFs or SMSF and people)

 

Yes

 

So, essentially, those that can afford to will, the rest won't be able to do it. Again, favouring the Boomers or those with sufficient funds outside of super to lend.

 

This is a super important point that people fail to realize. Technically not a redraw, but a savings account you can withdraw money from whenever you wish, but in the meantime it saves you on mortgage interest. An offset account is a splendid place to save for deposits on more properties.

 

Unfortunately it's getting pretty difficult to find an SMSF resi product with offset , now. Australian Unity ( formerly Big Sky) offer it still...

@Redwood can probably advise whether there are any other lenders still offering offset...

 

Those with cash outside of super to lend can't do it either. A related party loan is still an LRBA I belive. It'll come down to cash purchases inside super. Some kind of unit trust structure outside super making sure not to break any In house asset rules.

ATO latest stats show about $40bn in LRBAs, with $19bn in resi. Other than the fact that LRBA will likely be gone if ALP takes power, it'll leave a mess of the existing arrangements where SMSFs can't even refinance and the small selection of post-LRBA lenders may decide to call the loan and quit the market. Not a good prospect.

 

Anyone know if the report on LRBAs by Council of Financial regulators is out? I only found this FOI document.

Limited Recourse Borrowing Arrangements

 

A few bad one-stop shops ruined it for the rest of us

What will happen with LRBAs? | Bruce Brammall Financial

Biggest threat … and easiest solution

There is a genuine concern that newby SMSF trustees are being stripped of their super savings by property developers. I’ve said countless times in the past that one-stop property development shops are the single biggest threat to new, or wannabe, SMSF trustees.

They have a slick sales solution for those desperate to get into the property investment market. Particularly those who are unable to do so in their own names, but who have $200,000 or $250,000 in combined husband-and-wife APRA-regulated superannuation funds.

If governments are truly concerned about this, then they should ban the sale of properties to SMSFs that haven’t had occupancy certificates for more than a year. In the past, individual banks have made this a condition of the loan. That was the banks protecting their own arses. But get APRA to make it a lending condition, as they have made countless other rules for lending in the last 3.5 years.

This would stop any interaction between developers and members of the public who might be able to be persuaded to purchase, via LRBAs, into a crappy investment property where they are destined to do their dough.

Coincidentally, ASIC has launched further action against a Queensland mortgage broker (and “former” financial adviser), who they allege was providing financial services without a licence or authorisation.

ASIC is circling those who are providing one-stop-shop advice to potential SMSFs via property developers. And it won’t stop there. Expect class actions to begin this year also, with victims of one-stop-shop outfits linked to property developers to be the main target.

This year, 2019, is going to be a big year on this topic, whether Labor tries to implement its ban, or not.

 

Superfunds cannot borrow. there is a limited exception though where the trustee is borrowing to acquire a single acquireable asset and the loan will be made to a custodian trustee under a limited recourse arrangement. It doesn't matter if the lender is a related party or a bank.

 

Coalition don't seem to be opposing LRBA ban either. They put it on review several years ago, which may be a buying time tactic or they may actually ban it as well.

 

Topical - yes.

I expected this to happen much soon, however a favourite of mine Macquarie is now out.

Lucky as I have 6 applications waiting for formal - that we have until 30 April and 2 months to settle.

"As part of our continued focus on delivering the most competitive home loan product and best possible experience for clients, we’re streamlining our core Macquarie home loan offering. This means we’ll no longer be offering family guarantee loans from 18 March 2019, and SMSF residential home loans from 30 April 2019. "

Good news for LA Trobe.....

Cheers Ivan

Any applications in progress for these products will need to settle by 30 June 2019. We’ll continue to service existing clients who hold these products.

 

You have to question the concerns some existing borrowers will face in the future. Refinance is a problem. Lack of competition and enhanced funding costs have to push margins up. Lenders have no reason not to lay the boot in with high rates after almost all exit the market.

The saving factor is that many of these loans are at lower LVRs and for early adopters their LVRs are probably low.