Downsides in shift to SMSF lending

by Robin Christie28 Aug 2012

Investors have been warned of the downsides of SMSF lending, as the value of residential property being held in SMSFs is grew by around $1bn per year.

The report showed that ATO data indicates that the value of residential property being held in SMSFs grew from $10.825bn in June 2008 to $14.868bn last March.

In the findings, released by Fairfax, AFA president Brad Fox commented that limited recourse mortgages, which SMSFs use to purchase residential property, do have their downsides.

“Because of the type of mortgage, there are more costs involved in both the higher interest rate demanded by the banks and the greater legal costs to establish this sort of a loan,” he told Fairfax. “That will sometimes catch out an unknowing buyer.”

He added that compliance breaches can also be “horrendously expensive to correct” when it comes to investing in residential property through an SMSF.

Destiny Financial founder Margaret Lomas also has her reservations when it comes to the merits of using SMSFs as a vehicle for residential property investment.

“In my view, the restrictions on what you can do are onerous, compliance is complex and expensive, and many of those currently being sold simply don’t have enough money in their super fund to justify pulling it out of a perfectly-well functioning public super funds and leverage it against property,” she said.

Hurdles aside, Fox, believes SMSFs may eventually account for up to 20% of the residential property market, but this will be due to already active investors choosing SMSFs, he says.