How to get around the SMSF property curbs

Self-managed super funds looking to buy geared property are being squeezed for options, as lenders exit the market and jack up interest rates.

Lenders have generally moved to limit lending to SMSFs in the wake of pressure from the Australian Prudential Regulation Authority to choke overall loans for investment purposes.

Interest rates for SMSF loans, new and existing, have been raised across the board in the last fortnight, while other lenders have cut maximum loan-to-valuation ratios.

AMP, with reasonable volumes in the SMSF space, has completely withdrawn from the SMSF loans market, at least temporarily, as it was well above APRA's preferred target of 10 per cent growth for investment lending.

This follows an announcement earlier this year by NAB to completely withdraw SMSF property loan products, known as limited recourse borrowing arrangements (LRBAs). At about the same time, ANZ reiterated that it would not enter the SMSF lending market, when it declared LRBAs are “incompatible with the objectives of superannuation” in its response to the Financial System Inquiry. The FSI, chaired by former Future Fund chair David Murray, recommended the banning of SMSF gearing.

In recent weeks, as part of the broader changes announced by banks reacting to pressure from APRA:

• Banks have increased interest rates for SMSFs in line with other loan rate increases, largely by a minimum of 0.27 per cent.
• St George and Bank of Melbourne (both owned by Westpac) have cut maximum LVRs from 80 per cent to 72 per cent.
• AMP has exited the investment property lending market completely, while raising interest rates for existing investment clients by 0.47 per cent.

Banks have been responding to concerns by APRA – the government body responsible for making sure our banks, insurers and super funds stay afloat – that the level of investment lending is too high, particularly in overheated markets in Sydney and Melbourne.

The concern was first publicly raised late last year. In April/May this year,
APRA started putting pressure on banks, who responded by removing some of the top-end discounting for investor borrowers, creating interest rate differentials between homeowners and investors for the first time.

SMSFs, who weren't offered extra discounts, were unscathed at the time.

But in this second round of pressure from APRA, banks that had investment lending growth above 10 per cent reacted by putting up interest rates for investors by between 0.27 per cent and 0.47 per cent.

Some banks, including Bendigo and Adelaide Bank (which does not do SMSF loans) and Suncorp have not yet raised rates for investors, as their loan books had not been as heavily weighted to investors as many other lenders.

In this most recent round, SMSF loans were generally hit with the increases.

If round two doesn't work to do what APRA is hoping it will achieve, expect round three.

Increased rates for LRBA loans could again increase the appeal of “related party” loans to SMSFs. This is where SMSF trustees themselves become the lenders, usually by borrowing against other property assets, to loan to the SMSF.

For those with plenty of equity in other properties – potentially your home or other investment properties – it is possible to become the lender to your super fund.

While I wrote this column – DIY and property: you be the banker (April 21, 2010) – more than five years ago, the outline of the structure of how to become the banker to your SMSF remains largely the same.

Another potential advantage of related party loans is that you would not be limited to an LVR of 75 or 80 per cent. You could, potentially, make a loan to your SMSF for 100 per cent or 106 per cent of the value of the property (the extra 6 per cent to cover purchase costs, including stamp duties).

No amount of jawboning or adjustments to date have had an impact on slowing Sydney and Melbourne's runaway property markets. The Reserve Bank said in its quarterly statement, released this week, that it believes the low interest rates (they were reduced in May and February) have not yet had their full impacts on property prices and may add further fuel to the fire.

Sydney property prices have jumped 19.8 per cent (with houses now topping $1 million), and Melbourne 12.3 per cent, in the last year, according to CoreLogic RP Data.

The RBA noted that “housing prices outside of Sydney and Melbourne are little changed over the past year or so and may not yet have responded fully to the very low levels of interest rates”.

One further issue for SMSFs who have existing borrowings is the difficulty in refinancing to cheaper rates. Most SMSF loans come with upfront fees of an average of $1500 (usually to banks' lawyers to read trust deeds), making any switch on interest rates a long-term proposition to come out ahead.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au. Bruce's new book, Mortgages Made Easy, is available now.