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‘Mortgage prison’: SMSF reforms reshape lending market as borrowers weigh next move
Thousands of investors have been forced to consider their next move amid the phase-out of residential SMSF borrowing, but opportunities still remain for those who think outside the box.
Following the federal government’s changes to borrowing through self-managed super funds (SMSF) for residential property, many investors have been left scratching their heads about their next move.
In a recent episode of The Smart Property Investment Show, host Phil Tarrant and Finni Mortgages principal Eva Loisance discussed the ramifications of the reforms on borrowers and lenders, and the way the market was likely to shift going forward.
The duo said that for current borrowers, there may be a risk of being unable to refinance or repay their loans, while there would also likely be a rise in “spruikers” promoting unregulated SMSF schemes.
On the other hand, they identified opportunities for investors looking to take advantage of SMSFs in other ways besides borrowing for residential property, such as unit trusts or pivoting to the commercial sector.
With the reforms to officially begin on 10 August, Loisance said investors had until right up to the day before to enter into a contract to borrow through their SMSF, but many banks and lenders may opt not to allow it anymore.
“We had AMP last week saying, well, no more, and then this week saying, actually, we can get some business, so let’s reopen the door,” she said.
“We don’t know if lenders are going to be happy to actually proceed with this until the very end; tomorrow, they could close the door.”
As a result of the changes, Loisance warned that current borrowers could potentially become stuck with expensive loans if they are unable to refinance.
She said in the past, when major lenders stopped offering SMSFs, they increased their interest rates heavily to encourage borrowers to refinance with other lenders or pay off their loans.
“Some people might have been able to get the loan in the first place but might not have been able to refinance, like self-employed people, or those who had a healthy job at some stage, and now they’re part-time or casual.”
Tarrant agreed that there was likely to be a new version of “mortgage prison” for borrowers, trapping them inside their super fund.
Additionally, he projected increased competition among lenders for borrowers who were refinancing, given that there weren’t going to be any new residential SMSF investors in the market.
As a result, lenders may adopt different pricing strategies, with some raising interest on SMSF loans, taking advantage of investors’ limited options, while others may keep rates lower to attract more customers.
“So some lenders will look to grow market share so the size of the pie won’t grow, but the makeup of the pie will certainly change as lenders put their rates up,” Tarrant said.
He added another potential repercussion of the ban was a possible rise in the number of spruikers in the market promoting poorly regulated SMSF schemes.
“I think there would be more property and finance brokers coming out of the blocks around SMSFs, now that you can’t borrow directly into a super fund.”
When it came to remaining opportunities, Tarrant said investors can still take advantage of limited recourse borrowing arrangements (LRBA) for commercial property.
He also said some residential investors may apply for new loans through SMSFs before the 10 August cut-off point, but warned against rushing into a purchase without much forethought.
Loisance said lenders were likely to be extremely careful with processing SMSF loan applications in the coming months, ensuring that investors weren’t simply purchasing for the sake of it.
“And there’s a lot of regulation for SMSFs, the type of property might not be right, there’s lots to consider there.”
Loisance also warned that there was more complexity associated with borrowing through SMSFs, which can increase the risk of further settlement delays.
“You need a financial planner, you need an accountant, you need a broker, you need a solicitor, you need legal advice as well, you need a lawyer, that’s a lot of people.”
According to Tarrant, even if an investor decided it was the right time to purchase with their super, it didn’t necessarily mean that the asset they were purchasing was a good deal.
“You can even get even more locked up if you buy the wrong asset inside of your super fund in this period of time.”
“There are limitations about what you can do with that asset while it has debt on it. So now more than ever before, asset selection is going to be absolutely critical.”
Additionally, Tarrant said investors could use SMSFs to invest in units of a trust, which would then borrow money to purchase the property, rather than the SMSF taking out the loan directly.
However, Loisance warned that the method had limitations, including that the investor cannot be the sole owner, as there must be other investors in the trust.
“The lending is not with the SMSF, but with that you cannot be the sole owner, so that means you need to invest with someone else, an unrelated party to yourself.”
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