Gearing on shaky foundations
Beware of property spruikers pushing the tax benefits of gearing property inside superannuation. Falling property prices in Sydney and Melbourne and lenders with "blacklists" of apartment blocks on which they refuse to lend add another layer of risk to gearing property through a self-managed super fund.
Beware of property spruikers pushing the tax benefits of gearing property inside superannuation. Falling property prices in Sydney and Melbourne and lenders with "blacklists" of apartment blocks on which they refuse to lend add another layer of risk to gearing property through a self-managed super fund.The rules under which SMSF trustees are allowed to invest in property have been loosened in recent years.Not all that long ago, funds were not allowed to borrow to invest in property. In 2007, the government began relaxing the borrowing rules. DIY funds can borrow to invest in property but there are restrictions. Geared property is not held in the SMSF but in a separate legal structure, with the fund as the "beneficial owner" of the property. The loan to fund the purchase must be limited recourse, which means the lender has no call on the fund's other assets if there is a default on the mortgage.Limited recourse is important in ensuring trustees do not gear too highly into property. Because the lender has the property only as security and no further recourse to other assets, lenders will lend only at conservative loan-to-valuation ratios.Property inside super can make sense. The problem is with those spruikers, real estate agents, mortgage brokers and developers who target those in good, low-cost, well-run super funds. The internet is full of "opportunities" that promise good returns in a short time on geared property inside super. Consumers may not have thought of starting their own super fund until the idea was floated by a commission-driven salesperson.Another area of concern is off-the-plan apartments. Buying off the plan is always riskier than buying a house already built. But the risks are even greater when buying off the plan through super. There is a long lag between signing the contract and the completion of the apartment. There are very real risks in Sydney and Melbourne property, with prices in both cities falling. If the valuation of the apartment falls when it is time to complete the contract, lenders can refuse to lend or reduce how much they are prepared to lend.And the banks maintain blacklists of apartment buildings on which they refuse to lend, or offer only restricted finance, because of concerns about the type of building and quality of construction, among other reasons.Regulators need to look at property investment and self-managed super funds. Experience shows whenever commission-driven sales are involved, advice is often compromised.