Risks flagged as banks exit SMSF lending

Further exits by ADIs from the SMSF lending space could see “an influx of mezzanine lenders” that may result in higher interest rates for loans and greater risks for trustees, the SMSF Association has warned.

SMSF Association director of technical and professional standards Graeme Colley explained that the tougher prudential controls imposed on banks by APRA is seeing banks tightening up on their lending policies for SMSFs.

“Through these bank restrictions on loans, the market may tighten up and restrict it,” he said.

“I think the complexity of [LRBAs] is one reason the banks [in some cases] have gotten out of it and the other reason is APRA tightening up on the lending criteria – that’s why we’ve seen CBA and Westpac increase interest rates.”

If all the banks and larger institutions leave the SMSF space, Mr Colley says this could mean “an influx of mezzanine lenders” that is likely to result in loans with higher interest rates and greater risks.

“The first [risk] is higher interest rates which could [require] greater security or a higher level of deposits from a superannuation fund so the greater security may be the other assets owned by members,” he said.

“The superannuation fund may have to make a greater deposit on the investment and that will mean dedicating more of its assets for the purchase of the property.”

In situations where the investment in the property goes bad, Mr Colley said this could be a problem because it will mean the deposit put forward by the super fund is partially lost because of the loan transaction.

“That’s something David Murray raised; he said that with LRBAs the risk is with the superannuation fund because the superannuation fund puts the money in and banks tie everything up and they’re going to ensure they get their money back,” he said.

“So if the investment goes bad, the super fund loses out.”

The federal government recently announced that it did not agree with the Financial System Inquiry’s recommendation to prohibit limited recourse borrowing arrangements by SMSFs – the only one of the 44 recommendations not accepted.

FBAA chief executive Peter White said he agrees with the federal government’s stance on SMSF lending because the volume is not enough to cause concern and warrant intervention.

“In reality, the level of activity with borrowing has been small in the overall context of total assets inside the SMSF and broader superannuation sectors,” he said.

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