Brokers are experiencing increased demand for clients wanting to purchase residential and commercial property within their self-managed superfunds (SMSF).
The reason is clear: mainstream lenders have largely pulled out of the space, leaving a major gap in the SMSF market with some clients still stuck on double digit interest rates.
This presents an opportunity for brokers to offer value through the non-bank market, with many lenders bolstering their offerings and offering sharp rates.
However, not all SMSF products are created equal, and the interest rate is only one factor in a myriad of competing considerations in this space.
Australian Broker talked to two expert brokers in this space – Veronica Vojnikovic and Clem Kian – about the features they look for in an SMSF product.
What’s happening in the SMSF lending landscape?
Both Kian and Vojnikovic have seen an increase in SMSF activity, driven by a rise in SMSF applications and enquiries. This growth is largely being fuelled by the 55 to 64 age group, which represents 32% of the SMSF market, according to Kian (pictured above left), founder and director of Finselect Group.
According to an ATO report, SMSFs hold an estimated $876.4 billion in total assets, an increase of 4% from the previous year. However, the pool of non-bank lenders is limited compared to the growing market.
Despite this, Vojnikovic said non-bank lenders still offer significantly lower interest rates than traditional lenders.
“We have seen a few more lenders come into the SMSF market giving the existing SMSF players the push needed to sharpen their rates, fees, and features,” said Vojnikovic (pictured above right), director of Vevo Financial Services.
Some lenders, such as Granite Home Loans and Firstmac, offer additional features that are appealing to SMSF clients.
“Granite offers an offset account which has been a popular request while Firstmac offer minimal upfront fees with no ongoing fees,” Vojnikovic said.
Pepper Money is another lender that has recently entered the SMSF space, with its “super-smart” SMSF product range on both brokers’ radar.
“Pepper’s new SMSF product offers low fees amongst the other banks, their most appealing feature is the redraw facility which can be used towards repairs and renovations on the property,” said Vojnikovic.
What SMSF product features are most important?
While competitive interest rates are crucial, both brokers emphasised other product features that differentiate high-quality SMSF products.
Kian said the number one feature he discussed with his clients was whether the product had an offset account.
“This will be in line with the advice that their professional has recommended, as it will allow them to repay back the mortgage quicker,” Kian said. “This is especially if the advice presented to them is to repay back the debt at retirement, to take advantage of their passive income derived from the asset.”
“Offsets are also handy if my clients are a little older and have a certain number of years remaining in their working career before they retire.”
Vojnikovic agreed with the importance of offsets, although she said, “there is still internal debate as to whether the redraw and offset account features meet the SIS Act compliance requirements”.
“The SMSF lending space is still growing and learning as it navigates this highly regulated environment,” Vojnikovic said,
Kian also highlighted the importance of flexibility in loan products, particularly the ability to make lump sum and additional repayments to accelerate mortgage payoff. "This complements the reasons outlined in point one,” he added.
Finally, Kian stresses the need for brokers to understand lender liquidity requirements. “This can make or break our ability to assist clients, as some lenders on our panel don't require liquidity tests,” Kian said.
Vojnikovic advocated for lenders to eliminate liquidity requirements altogether, along with reducing upfront fees and softening rates. “These are essentially retirement funds, and this needs to be considered from an ethical perspective,” she said.
How brokers can navigate the SMSF market
While the onus is on lenders to improve their products, brokers also need to pay special attention to how they operate in the SMSF space.
Kian said he kept in regular contact with his clients overall, not just with clients who had or intended to purchase a property within their SMSF to ensure that their loan remained competitive and still met their needs.
“We have also partnered up with some great financial planners and accountants who provide tailored advice to customers, which will allow them to make an informed decision,” Kian said.
Education is key when it comes to managing client expectations and providing in depth advice and solutions in relation to SMSFs mortgages, according to Kian.
“Having a great network of industry professionals is key when it comes to SMSFs as there are some strict laws and regulations when it comes to investing within the SMSF.”
Vojnikovic said brick and mortar had always been the most effective investment strategy to grow wealth passively.
“I commend the non-banks for entering the SMSF market. Clients now have the opportunity to control their financial future to meet their retirement goals,” Vojnikovic said.
“Brokers who do not diversify in this space will may face some barriers when it comes to providing a wholistic service to their clients,” said Kian.
“In today’s lending landscape, customers as seeking a premium a professional service which can cover a range of offerings, with SMSF lending being part of it.”