Paul's Insights: Lenders walk away from SMSF lending
AMP recently joined the Commonwealth Bank, Westpac and other lenders, in announcing it will no longer provide property finance to self-managed super funds (SMSFs). It means the writing could be on the wall for SMSFs to borrow to invest in property.
For several years now, SMSFs have been able to borrow to invest in residential property through “limited recourse” loans. If a SMSF defaults on this type of loan, the lender can only make a claim on the asset secured by the loan, in other words, the SMSF’s investment property. The lender cannot touch the other assets held in the SMSF to make good on the property loan.
This system of non-recourse borrowing for SMSFs worked well while property values were rising. But as we’ve seen in recent months, the property market moves in cycles. After an extended run of strong gains, home prices in Sydney for example, have dropped 5.6% in the last year alone.
Lenders have a lot on their plate right now – a regulatory squeeze, a less-than-glowing Banking Royal Commission, and falling property values in many areas. That’s forcing a rethink of the risk in their loan books. In practical terms it means lenders are being far more picky about who they lend to, and with their non-recourse loan terms, SMSFs are looking way less attractive than they used to. As research group RateCity notes, “In a falling property market, it’s not surprising we’re seeing lenders retreat from this type of lending.”
Personally, I’m not upset about this. Superannuation has always been about building long term wealth via compounding returns in a low tax environment. It is not about speculative gearing into property, which will go badly pear-shaped in any decent downturn.
We already enjoy big tax concessions in super on both our contributions and the returns our investments earn. I have always been against super funds gearing into residential property. We tend to own that in our own names anyway.
In my view super is about building wealth tax effectively in a diversified pool of assets, using regular contributions, time and compound returns to build wealth. We pay less tax today, which is a cost to our community. But in return we build a pool of assets and in time, draw less from the aged pension system. A super fund heavily geared into residential property may deliver very poor returns, and in turn, a very poor return to our community, who provided the tax breaks
Frequently Asked Questions about this Article…
Lenders such as AMP and Commonwealth Bank are halting SMSF property loans due to the increased risk associated with falling property values and regulatory pressures. This makes SMSFs less attractive for non-recourse loans.
A limited recourse loan allows SMSFs to borrow for property investment, where the lender can only claim the secured property if the SMSF defaults, not other assets in the fund.
With property values dropping, lenders are reassessing risks, making SMSF lending less appealing. This shift is due to the cyclical nature of the property market and recent declines in areas like Sydney.
Investing in residential property through SMSFs can be risky, especially in a downturn, as it may lead to poor returns and affect the community that provides tax concessions.
Superannuation is designed for long-term wealth building through diversified investments and compounding returns, not for speculative property investments that can be risky in downturns.
A diversified superannuation portfolio helps build wealth tax-effectively, reduces reliance on the aged pension, and mitigates risks associated with concentrating investments in one asset class like property.
Tax concessions on super contributions and investment returns help build a pool of assets over time, reducing the need for government support in retirement.
SMSF property gearing can lead to poor returns, which may not justify the tax breaks provided by the community, potentially resulting in a higher reliance on public resources.
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