Why is SMSF lending taking off?

In the past 18 months, new rules have been brought in to increase the number of members who can be involved in a self-managed superannuation funds, raising it from four to six (as discussed in the February 2022 edition of The Adviser). This particularly benefited larger families, and has resulted in an increase in both the number of SMSFs in Australia and the value of assets held by them.

But it’s not just these changes that have been impacting the SMSF space — changes in the economic and property market have, too. According to a recent report on leverage and risk in the superannuation system from the Council of Financial Regulators, the value of assets held under LRBAs increased to $59.7 billion in June 2021 — no mean feat considering this is seven times what it was in June 2013 ($8.8 billion). 

Moreover, LRBA assets represented 7.2 per cent of total SMSF assets as at June 2021, up from 6.6 per cent in June 2018 and 1.9 per cent in June 2013, while the total borrowing amount outstanding for SMSFs was around $27.8 billion as at June 2021.

Real property continues to represent a significant proportion of the assets held by SMSFs with LRBAs (around 96 per cent) and while SMSFs remain a small driver of growth in the lending for property market investment, it’s growing. 

This can partly be attributed to the fact that rates have been particularly low over the past few years, while house prices have been increasing. As such, SMSFs are increasingly using LRBAs to purchase higher value assets, ATO stats show. For example, SMSFs with LRBA assets valued greater than $1 million grew to 9,175 (15.6 per cent of all SMSFs with LRBAs) in 2020, up from 1,647 (11.7 per cent of all SMSFs with LRBAs) in 2013.

Why is SMSF lending attractive?

Acquiring property through SMSFs has been seen as an attractive investment in this changing environment,

Speaking to The Adviser, Firstmac’s chief financial officer, James Austin, commented: “More borrowers have been turning to residential SMSF loans because people have more confidence in their ability to pick a residential property investment as opposed to a share portfolio.

“We’re seeing they are not putting all of their money into SMSFs. A lot of people run an industry fund alongside an SMSF and they’re using the SMSF to buy property and the industry fund to invest in an equities portfolio.”

Moreover, La Trobe Financial’s chief lending officer, Cory Bannister, outlined that there were several other factors driving people to acquire property through their self-managed super, including because: 

• They do not typically prefer high-end property where the biggest dips have been 
• Rental returns are skyrocketing due to record low vacancy rates 
• They are less affected by inflation because mortgage repayments aren’t made from take-home pay 
• They are, by definition, a long-term retirement investment; and
• They are not limited to residential investments that include owner-occupancy rules

Indeed, non-banks such as La Trobe Financial have been busy servicing SMSF clients in droves. Lending growth in this space has largely focused on the non-bank segment of the market after the major banks largely withdrew from new lending to SMSFs in mid-2018 (as new regulatory requirements were brought in).

To put that into context, according to the Australian Prudential Regulation Authority (APRA), lending to SMSFs comprised less than 1 per cent of overall residential mortgage lending by all banks as at the March quarter 2022. The major banks still hold around $8 billion of outstanding loans to SMSFs on their balance sheets, according to APRA data. 

Non-banks that don’t have to comply with the same prudential regulatory requirements as the banks have therefore stepped into the void. Non-bank lending to SMSFs now represents around 36 per cent of total lending to SMSFs in mid-2022, compared to around 24 per cent of total lending to SMSFs in late 2020. Their speedy approval times and specialist knowledge have been a boon for SMSFs looking for a lender. 

Where next for SMSF lending?

As we enter a downturn in property prices, what’s on the horizon for SMSF lending and demand? According to the non-banks, it’s onwards and upwards from here.

Firstmac’s Mr Austin commented: “We expect that the residential SMSF lending market will continue to grow, so long as SMSFs themselves keep gaining in popularity.

“This is a segment that has been underserviced by the major lenders, so we took the opportunity to offer a product with substantially lower fees and interest rates and an uncomplicated application process. We have attracted a sizeable and growing inflow of SMSF business based on that very competitive offering.” 

Similarly, La Trobe Financial’s chief lending officer commented that the “cyclical nature of the Australian property market means there will be plenty of opportunities for SMSF investors, who are largely insulated from any broader property price falls”, highlighting the non-banks’ range of award-winning SMSF products would be available to support them.

With this expected demand for SMSF lending, John Mohnacheff, Liberty Financial’s group sales manager, suggests that there is an opportunity here for both SMSF trustees and their brokers.

He explained: “With more customers becoming aware of the advantages of LRBAs, self-managed super funds will likely continue growing in popularity next year. 

“We expect rising rates and inflationary pressures will have people re-evaluating their finances and taking greater interest in their superannuation. 

“Australians also have a passion for property and a desire to take control of their investments, which are driving SMSF growth particularly when it comes to commercial property.”