Westpac and its subsidiaries will withdraw from lending to small super funds at the end of this month. Supplied
Westpac is set to rock the increasingly nervous property market by withdrawing new loan offers to self-managed superannuation funds looking to invest in property.
The bank, the nation's second-largest mortgage lender, and its subsidiaries Bank of Melbourne, St George Bank and BankSA, will withdraw from lending to small super funds at the end of July, to "simplify and streamline" its products.
The move has shocked mortgage brokers and financial advisers, who act as intermediaries between borrowers and the banks, but complements a change in lending strategy the banks have rolled out in recent weeks.
It will also make already jittery property investors even more nervous about the outlook amid falling prices, rising costs and oversupply, particularly for apartments in the inner suburbs of Melbourne, Sydney and Brisbane.
"We continually review our products and services to ensure they meet the requirements of our customers," a Westpac spokesman said. Brendon Thorne
Westpac will continue to service customers with existing loans through switching loans and extending loan maturity. What the banks can do will depend on credit policy.
Regulators fear systemic problems being caused by SMSF investors encouraged to leverage their superannuation and invest in a single residential property because of the lack of diversification and increasing dangers of loss in a falling property market where it is difficult to find tenants.
One key finding of the David Murray-led financial system inquiry in 2014 was that leverage should be banned in superannuation funds to mitigate the risk of financial instability. The government rejected his advice and Mr Murray said that was a mistake.
Mr Murray, who was recently appointed chairman of AMP, the nation's largest financial conglomerate, is expected to launch an internal review of its SMSF lending practices.
A recent ASIC review of 250 randomly selected client files and found 90 per cent failed to comply with the "best interests" test and other legal obligations. Jim Rice
Professor Deborah Ralston, chairperson of the SMSF Association, said "there is a place" for property in SMSFs in a diversified, multi-asset investment strategy.
The Australian Securities and Investments Commission recently raised concerned about dodgy advice being given to unsophisticated SMSF investors.
Not a systemic risk
SMSF Association policy head Jordan George said his understanding was that while NAB and ANZ did not lend to SMSFs, Commonwealth Bank and Macquarie did, but had very stringent lending criteria.
Mr George said rather than being related to any systemic risk, the trend for major banks to exit the space was driven by capital adequacy requirements.
"We think increased capital adequacy requirements by APRA are driving the trend by the majors to scale back.
"The margins banks can make are being diminished because of the capital they have to be able to hold to offset these loans."
The greater complexity associated with SMSF loans and relatively small size of the market were also disincentives, Mr George said.
"As banks are looking to streamline and reduce costs, these are the types of products that get reduced," he said.
BDO business services partner Chris Balalovski said consumer lending was a sensitive area and especially so when it involved people's retirement savings.
"It was inevitable that banks were either going to proactively – or be pushed – into rolling back their lending offerings to self-managed super funds," he said.
"Borrowing can hypercharge gains but it can also magnify losses. However, we don't see any of these decisions by the financiers have been influenced by that.
"It does seem to be in response to potential negative community or even regulator backlash.
"There is nothing in the publicly available statistics to suggest that this is a problem in the sector.
"Borrowing has a place in any sound investment strategy, whether it's for a self-managed super fund or a private company, so long as it is properly formulated and takes into consideration the risk of the asset you're investing in, liquidity and diversification."
A recent ASIC review of 250 randomly selected client files and found 90 per cent failed to comply with the "best interests" test and other legal obligations.
"The strategy of gearing through an SMSF to invest in property, which is being actively promoted by 'property one-stop shops', is high risk," the ASIC report said.
There are fears that legal restrictions – or caps – on how much a SMSF investor can contribute to their plans could cause a credit crunch for many borrowers and force fire sales of their properties, which becomes more likely as property capital values and yields slump.
This scenario could arise if the expense of renovating a property, or supplementing rental income, exceeded annual caps.
Tougher scrutiny on other borrowers
Westpac's move could also herald a change in strategy away from risky investors to low-risk premium investor and owner-occupier fixed-rate borrowers by offering discounts of up to 50 basis points and free international trips.
It recently introduced tougher scrutiny of borrowers' capacity to service a loan across the proposed term by deeper analysis of their income and expenditure.
Their recent discussions with mortgage brokers indicate continued confidence in the property sector despite conceding greater borrower nervousness.
For example, it is offering borrowers limited-term discounts of between 30 basis points and 50 basis points on principal and interest and interest-only loans of at least $150,000.
For example, five-year principal and interest borrowers are being offered a 40 basis point discount of the headline rate of 4.09 per cent. There is a $395 annual fee.
One-year interest-only repayments are being offered with a headline rate of 4.39 per cent with a limited-term 50 basis point discount.
Borrowers are also eligible for enhanced Velocity frequent flyer points with a $250,000 loan earning a couple 200,000 points, enough for a return flight to Hong Kong, and a $1 million loan qualifying a couple to fly economy return to London from any Australian capital.
Other major lenders are also tightening their SMSF lending policies in addition to increasing rates on loans and other property-related credit.
By Duncan Hughes & Joanna Mathers
The Financial Review
16 July 2018