It’s getting a lot harder for self-managed super funds to secure loans for property. And that may not be a bad thing.
AMP recently joined the Commonwealth Bank, Westpac and other lenders, in announcing it will no longer provide property finance to self-managed super funds. It means the writing could be on the wall for SMSFs to borrow to invest in property.
For several years now, SMSFs have been able to borrow to invest in residential property through “limited recourse” loans. If a SMSF defaults on this type of loan, the lender can only make a claim on the asset secured by the loan, in other words, the SMSF’s investment property. The lender cannot touch the other assets held in the SMSF to make good on the property loan.
This system of non-recourse borrowing for SMSFs worked well while property values were rising. But as we’ve seen in recent months, the property market moves in cycles.
Lenders have a lot on their plate right now – a regulatory squeeze, a less-than-glowing Banking Royal Commission, and falling property values in many areas. That’s forcing a rethink of the risk in their loan books. In practical terms it means lenders are being far more picky about who they lend to.
In my view super is about building wealth tax effectively in a diversified pool of assets, using regular contributions, time and compound returns to build wealth.
A super fund heavily geared into residential property may deliver very poor returns, and in turn, a very poor return to our community, who provided the tax breaks.
By Paul Clitheroe - Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.