Late 2014, the “Financial Systems Inquiry Report” (“FSI”), provided 44 recommendations, one of which was a proposed “Ban on limited recourse borrowing arrangements” or SMSF Loans. This caused significant uncertainly for SMSF professionals and investors.
Last week, there has been a major development with Assistant Treasurer Mr Josh Frydenberg gave the biggest indication that SMSF loans are here to stay. There will be no ban on SMSF Loans, however borrowing rules may be tightened.
What are SMSF Loans?
Under Superannuation Law, you can set up an SMSF and borrow to invest in property. Features of SMSF Loans include:
- SMSF Trustees are able to borrow up to 80% of the value of a property;
- The Property is held in a Bare Trust, beneficially for the SMSF;
- SMSF loan is ‘Limited Recourse Loan’, meaning the SMSF lender cannot touch any other of the SMSF’s assets other than the property held as security, in other words the rights of the SMSF lender against the SMSF in the event of the SMSF loan defaulting are limited to the security property and
- SMSF Trustees are required to provide a personal guarantee
SMSF Loans
Why the controversy?
ATO statistics indicate that borrowing to buy property represented only a very small proportion of the total pool of assets invested in the $580 billion SMSF sector and that most of this was invested by business owners in commercial property.
So what’s the fuss with SMSF loans?
Since 2012, there has been increased supervision by ASIC in the SMSF sector due to concerns that unlicensed property spruikers are encouraging people to set up an SMSF to invest in property. In response to these concerns, Mr Frydenberg stated “To put it in context only 0.07%, perhaps 6,500 properties, were held in an SMSF through a limited recourse borrowing arrangement in 2013…We want to make sure the approach we take is proportionate to the risks that have been identified”.
Where to from here?
SMSF Loans will not be banned, instead borrowing rules will be tightened and we have seen this with changes in lenders criteria in the last 6 months. APRA changes to investment guidelines have seen lenders exit the SMSF Loan market including AMP, NAB, ANZ and The Rock. Further, certain lenders have amended their lending criteria and reduced Loan to Value Ratio (“LVR”). For example, St George has reduced their LVR from 80% to a maximum of 70% for residential property and included a 10% liquidity requirement.
SMSF Loans will be a niche for lenders and brokers alike, highlighting the importance of understanding SMSF Rules and Regulations when submitting an SMSF Loan.
One thing is for sure; SMSF loans will continue to be tightened in conjunction with regulatory action on property spruikers. More detail will be provided in the coming weeks when the Government releases its response to the FSI Report.
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