Limited Recourse Borrowing Arrangements (or SMSF loans as they’re commonly referred do) will no longer be offered AMP following it’s announcement that it will withdraw it’s loan product from sale as of 20 October 2018.
With all four major banks also not offering SMSF loans the number of providers are now limited to only a handful in both the residential and commercial property space.
Well known lenders that continue to offer SMSF loans include Macquarie Bank, Bank of Queensland, La Trobe Financial and Liberty Financial. Some smaller banks and non-bank lenders also continue to offer them also.
The question everyone is asking is “Who will be next to remove their products from sale?”. Some are likening the exit by the major banks from the Reverse Mortgage product space to the current exodus from the SMSF lending space. Reverse mortgages died a slow death and it would be difficult to find a lender now with an operative policy or product in todays market. While I don’t think the SMSF lending slow down is going to result in a domino style effect with other lenders withdrawing, lenders like Macquarie have shown in the past that they do not like to be the last bank standing.
The two products have very little in common aside from the fact that the major banks no longer offer them. Reverse Mortgages rely on a statistically driven period from the time of lending to the time of the borrowers death or eventual sale during which interest is capitalised. It didn’t take long for borrowers and regulators to realise that the compounding interest results in an accelerated loan balance increase and can erode 100% of the equity in a borrowers property during their lifetime (in particular if the property market cools).
SMSF loans operate on an entirely different regulatory framework and it is the complexity of the framework that has caused the major banks to reconsider offering them for sale. With the Hayne Royal Commission coming to an end it’s become clear that eliminating conflicts of interest will be part of the recommendations. SMSF loans pose a conflict of interest for groups or institutions that offer vertically integrated advice in both establishing SMSF’s and borrowing. While this conflict of interest risk is not limited to financial institutions (the royal commission singled out ‘one-stop-shop’ style businesses that also offered the property buying solution), banks would not be immune to issues that may arise from poorly advised SMSF trustees who entered into LRBA’s to purchase property.
Whatever the outcome of the Hayne Royal Commission two things are clear:
- SMSF’s are the fastest growing sector of the Australian superannuation industry and
- Australians love to invest in property
Having fewer lenders to choose from will result in challenges in seeing out SMSF loans, however for the time being the lenders that remain offer a competitive mix of policy and product.
Armen Vartazarian, Mortgage Broker.