Do you have an SMSF loan or are you planning to borrow?

The major banks have stopped approving mortgages for self managed superannuation funds but there are some lenders that can help.

Which banks have stopped SMSF lending?

2018 saw all of Australia’s largest banks exit SMSF mortgage approvals, namely:

We’re not entirely sure what decision lenders like Macquarie Bank and Bank of Queensland (BoQ) will make but watch this space.

What we do know is that less than a handful of second-tier lenders are now willing to consider SMSF mortgage applications.

Call us on 1300 889 743 or complete our online enquiry form and we can help you qualify for a loan to purchase residential property for your SMSF.

Commercial SMSF loans are now almost impossible

In early 2019, one of the only major banks to still offer commercial property loans for SMSFs made its lending policy even stricter.

These changes included:

  • Reducing your borrowing limit.
  • Requiring more liquid assets and cash reserves in your SMSF prior to purchasing the property and after settlement.
  • Requiring borrowers to be a business loan customer for at least 2 years prior to applying for an SMSF commercial loan.
  • Stopping interest only SMSF loans.
  • A requirement that SMSF members be in the accumulation phase when the loan is funded and for the duration of the loan term.

Can I refinance my current SMSF loan?

If you currently have an SMSF loan, you’ll still be able to make the following home loan changes on an internal refinance basis, depending on your bank:

  • Split your mortgage.
  • Switch loan products within the bank.
  • Extend the loan maturity.

Unfortunately, it’s very likely that you will be unable to switch from principal and interest (P&I) to interest only (IO) payments or extend your IO term.

Refinancing your SMSF loan to another lender is still possible but you have to present a strong application and choose the right lender.

Are low interest rates available?

SMSF loan interest rates come with higher rates than standard residential home loans.

However, the margin between lenders can be significant so are still savings to be had.

Apart from rates, low-risk borrowers may also qualify for:

  • Interest only periods (not for borrowers nearing retirement).
  • Loan terms of 30 years.
  • No liquidity requirements.

Why did the banks put the brakes on?

Lack of expertise

SMSF loan applications have always been difficult for major banks to process.

The reason is that banks have few credit officers who are experienced in handling these complex ownership structures.

It’s the same reason why it’s difficult to get approval for a trust loan.

Smaller teams mean there can be delays and mistakes when assessing your application.

The Superannuation Industry (Supervision) Act 1993 (SIS Act) sets out strict guidelines as to when and how trustees borrow from a lender.

Banks have to be sure they are also following the rules and set up the loan correctly.

Basically, the time and effort to get an SMSF loan approved doesn’t justify the return on investment for some banks.

Reputational risk

Lending to borrowers nearing or preparing for retirement can present a potential PR problem for the banks when things go wrong.

Many SMSF loan borrowers, for instance, don’t follow the rules set out in the SIS Act and by the Australian Taxation Office (ATO).

For example, some people borrow in their SMSF and then live in the property (owner-occupied), or use the funds to build a new home or to renovate an existing property.

This is usually not acceptable.

Other examples include:

  • Property spruikers selling off the plan properties: Market fluctuations over the 18-24 months it can take to complete a project increases the risk of the borrower being unable to settle and potentially losing their deposit.
  • Not renting out properties right away: This can cause cashflow issues in the SMSF.
  • Not undertaking property market research: Buying property for your SMSF requires due diligence on the property type, the location and vacancy to make an informed prediction on investment return.

It’s not necessarily that there’s a high rate of borrowers being given the wrong loan.

There are many factors involved in building a solid investment strategy for your SMSF, not least of which is the weighting to real estate.

Despite this, banks are often in the crosshairs of the media and it’s the reason why many have left this space.

Why is the government concerned about SMSF loans?

The Australian Prudential Regulation Authority (APRA) has been keeping a close eye on the super industry since the ban on SMSF lending was lifted in 2007.

This stemmed from a fear that highly-leveraged SMSF trusts could have a dire effect on retirement savings in Australia. The weighting to property was a sticking point.

It’s fair to say that a lot of this was based on misleading data and case studies, such as trustees not receiving the same return on investment from their SMSF as they would just buying shares directly.

In actual fact, the lower returns are usually the result of high management and compliance costs.

At any rate, it all came to head in the 2014 Financial System Inquiry (FSI), less than 10 years since the SMSF loan ban was lifted.

FSI Chairman David Murray was particularly worried about the level of property investment through limited recourse borrowing arrangements (LRBAs) and the poor advice borrowers had received from financial advisers.

Further concerns were raised during the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

As yet, the Government has not called for a flat-out ban on SMSF mortgages but this has not stopped the major banks exiting this space completely.

Discover if you qualify for an SMSF loan

Call 1300 889 743 or fill in our online enquiry form today to speak with an SMSF mortgage specialist about plans to invest in property.

We have many years of experience in SMSF lending and nearly 40 lenders to choose from.