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The SMSF lending domain is in a transformative phase, marked by substantial growth and regulatory shifts, offering a unique avenue for SMSFs to invest in property. Kate Aubrey explores how this evolving landscape is influencing lender strategies and the pivotal role of brokers in navigating these changes
In recent years, the SMSF lending market has experienced a significant upswing. By September 2023, the ATO reported that there were 611,961 SMSFs with a collective membership of 1,142,957 individuals, holding estimated assets totalling $884.6 billion.
The yearly establishment of new SMSFs has significantly increased, reaching 24,591 in the financial year 2023, compared to 13,473 the previous year and 8,490 two years prior. In fact, 7,836 SMSFs were established in the September 2023 quarter – the highest number ever recorded. But why?
Some of the demand can perhaps be attributed to more people being made aware of what their super is actually doing. Over the pandemic, when Australians were allowed to withdraw money from their super to put towards housing or stave off hardship, more people than ever were looking at what their super was doing for them.
Two years ago, regulations expanded the number of members allowed in SMSFs from four to six. This change notably benefited larger families, resulting in a surge in the quantity of SMSFs and the total value of assets they own in Australia.
Add to this the growing challenges of serviceability for borrowers and it’s perhaps unsurprising that more Australians have been looking to take control of their super and look to invest in property.
And many are turning to non-banks – such as Thinktank – to fund their property purchases. The non-banks are seeing a growing number of limited recourse borrowing arrangements (LRBAs) to broker clients, particularly as the major banks and mainstream lenders pull back from non-vanilla loans.
It’s a busy market, too. As at September 2023, SMSFs had $59.4 billion of LRBAs (where an SMSF trustee borrows from a third-party lender to purchase a single asset held in a separate trust).
What is being bought through SMSFs?
According to the general manager partnerships and distribution Peter Vala, there has been continuous growth in catering to both commercial and residential borrowers.
“While some SMSFs acquire residential property, it should be remembered that these properties are for pure investment purposes. They cannot be owner-occupied,” he told The Adviser.
Indeed, the property can only be used for providing retirement benefits to the SMSF members (otherwise it will breach the ‘sole purpose test’) and cannot be lived in or rented to related parties of the fund member.
“On the other hand, commercial properties may be tenanted by a business related to the members of the SMSF,” he said.
“Approximately 75 per cent of the SMSF transactions we have financed are commercial in nature and many are used to acquire a property for the fund members to accommodate a business controlled by SMSF members.”
What’s changing in SMSFs?
However, this growth has come under the scrutiny of regulatory bodies due to the unique operational, legal, and reputational risks associated with SMSF loans, which differ significantly from conventional mortgage lending.
The ATO has been vigilant in monitoring the risks stemming from the direct leverage of SMSF members, resulting in a tightening of regulations.
Recent government interventions, such as the updated interest rates for SMSF-related party LRBA loans effective from 1 July 2023, have triggered heightened refinancing activities.
The move raised interest rates for SMSF property-related loans to 8.85 per cent and has spurred borrowers to seek competitive rates offered by lenders below this threshold.
Additionally, the draft legislation to introduce an extra 15 per cent tax on earnings from individual superannuation benefits exceeding $3 million by 1 July 2025 has raised concerns about the financial impact on affected SMSF accounts.
A study by the University of Adelaide indicated that approximately 13.5 per cent of these accounts may need to sell assets due to insufficient liquidity to meet the tax obligations.
These measures, although not yet enacted, have sparked discussions about their potential implications on SMSF portfolios and member benefits.
Mr Vala said whenever any regulatory change of this nature arises, it forms a catalyst for trustees and their advisers to conduct an overall review of the fund.
“It is, therefore, a worthwhile initiative for existing SMSF LRBA borrowers to assess whether a refinance of a related party loan is now advantageous to produce a better long-term outcome,” he advised.
Younger Australians looking at SMSFs
Amid these regulatory shifts and evolving market conditions, brokers have emerged as pivotal facilitators in simplifying SMSF lending complexities.
Mr Vala said there is a growing number of brokers who have recognised that more and more Australians are exercising greater control over their own financial affairs.
“Especially in a time when volatility is increasing and some superannuation returns may not be meeting investment expectations,” he said, revealing that there has been a particular interest among younger borrowers in managing their investments through SMSFs, leveraging the tax advantages for long-term retirement planning.
The younger demographic, accounting for 13 per cent of SMSF members under the age of 44, has displayed a keen interest in leveraging SMSFs to enter the property market, Mr Vala said.
“There appears to be a greater number of younger borrowers who have equipped themselves with a high level of financial literacy and are willing and ready to manage their own investments,” Mr Vala said.
“The taxation advantages of utilising an SMSF for long-term retirement is particularly attractive to this market.
“Many people in this younger age group have accumulated more funds in their superannuation account than in their savings accounts and they could see this as a way to invest in property.”
Long-term outlook
Looking ahead, Mr Vala foresees a surge in refinances, anticipating that SMSF LRBA terms and conditions could be adjusted to optimise fund cash flow through reduced loan repayments.
However, he cautioned that refinancing is limited to the current loan balance plus refinance costs, without an option for cash-out refinancing.
Furthermore, as the landscape evolves, SMSF structures are expected to attract more attention from Australians focused on retirement planning.
Despite potential borrowing limitations based on member numbers and contribution limits, SMSF investments continue to present attractive financial opportunities when carefully considered with professional advice, he explained.
How Thinktank is helping broker clients with SMSF loans
Thinktank helped with the purchase of a commercial property by two SMSFs via tenants in common.
The property was vacant at the time of purchase, meaning there were no existing leases in place. It was intended for use as medical rooms, accommodating a mix of tenants from entities associated with the SMSF members and third-party leases. The SMSF members were also investing in a medical group and needed to acquire the property as part of their involvement.
Thinktank utilised projected member contributions and planned leases to be established at settlement to manage the loan obligations. Each SMSF had its standalone facilities without any cross-collateralisation.
LOAN DETAILS:
Thinktank provided two 80 per cent loan-to-value ratio SMSF loans. One for $679,500 and one for $330,300.
The loans were not interdependent and operated individually for each SMSF in line with the respective investment strategies in place.
Both loans were set over a 30-year term to minimise cash flow required for amortisation of the facilities. This allowed the client to retain maximum cash outside of the SMSFs to support the new business venture.
The security property needed capex for fit-out as medical suites. By nature of the lease particulars in place, this fit-out was able to be paid for by the lessee and during the lease term would see the fit-out transfer to the SMSFs.
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