SMSF lending: back to basics

by Otiena Ellwand02 Jan 2018

La Trobe Financial and Thinktank explain why this growing sector is worth exploring in 2018.

Q: Why should brokers consider adding SMSF loans to their business proposition?
Cory Bannister:
Brokers should consider offering SMSF loan products as part of their overall diversification strategy as it is such a significant growth area that is likely to include a number of their current and future clients. Unless brokers cater for their clients’ full finance needs, there is an increasing risk that they will leave you for someone who can, as often consumers are looking for a one-stop shop.

Peter Vala: From our experience at present, one in five commercial loans we see are in an SMSF structure of some form, so by not becoming involved you can miss out on up to 20% of deals in the market. SMSF transactions have a long duration, meaning your customer will remain with you for a longer period of time, allowing you to assist with other financial services products that best suit their needs.

Q: What should brokers be aware of when dealing with SMSF loans, and what are some of the misconceptions around them?

PV: We think that the degree of difficulty faced by a broker in delivering an SMSF loan to a client is overstated and is in part confused with the advice that should be provided by other qualified/licensed advisers. Remember, you can’t give advice on the SMSF; you are just delivering the loan.

CB: Any broker willing to undertake training and education for SMSF lending is capable of dealing in this space, and while there is a technical element, it is not overly difficult once you are across the specific product particulars and the requirements under the SIS [Superannuation Industry (Supervision)] Act. That said, SMSF lending is a niche area and should only be carried out by brokers looking to deal regularly in this space.

Q: How big is the SMSF market currently, and is it growing?
SMSFs continue to have a significant influence in the overall growth of the $2.3trn Australian superannuation industry, with SMSF assets growing by $219bn, or 55%, in the five years to 2016. Looking at growth in the number of SMSFs, this too has been on an upward trajectory, growing on average 6% year-on-year from 440,000 SMSFs in 2011 to 577,000 in 2016.

PV: The ATO periodically reports statistics, and for June 2017 total SMSFs in existence were reported as 596,516, with 1,124,453 members. The value of borrowings by limited recourse borrowing arrangements [LRBAs] has more than tripled since June 2013, which is put down to choice. That choice is much greater in SMSFs than other forms of superannuation savings.

Q: What sort of client would an SMSF loan suit best?
Whether an SMSF is best suited to a client should be discussed with their financial planner. However, we find the majority of our borrowers who are self-employed are seeking to acquire a freehold asset to house their trading business. They end up paying rent to themselves, and when they retire, that income and any capital gain is potentially tax free.

CB: We would recommend that the clients have an SMSF in place already, unless they are coming to you with advice from an adviser and are in the process of establishing an SMSF. It is not recommended to encourage clients to establish an SMSF unless they receive independent advice from an appropriate adviser first.

"One in five commercial loans we see are in an SMSF structure of some form, so by not becoming involved you can miss out on up to 20% of deals in the market”  - Peter Vala, Thinktank

Q: How are your companies making it easy for brokers to write SMSF loans?
We have purposely engineered this product, like all of our products, to be user-friendly for all brokers, removing many of the barriers to entry that can often be attached to specialist products. Brokers do not need separate accreditation and can use our standard forms and documents that they have been using for our other loan products.

Having an experienced team on the road, combined with accessible credit staff in the office, means that we can assist brokers using a consultative approach from submission through to approval. Having direct access to the decision-makers results in a much smoother end-to-end process.

Essentially, if you can write a standard residential or commercial loan product with us, you will be able to write SMSF loans, as the process and documents are the same, including online lodgement capability.

PV: With the assistance of our aggregator partners, we hold regular training sessions that specifically cover lending to SMSFs for commercial property purchases. Thinktank also provides every broker with a dedicated relationship manager that can workshop and assist with any submission that comes to hand. In addition, our website contains a comprehensive schedule of supporting documentation which provides valuable guidance in covering off the vast majority of requirements involved in SMSF LRBA transactions, including clearly describing what requirements there are of each of the parties associated with the loan. The website also offers a rich source of educational material that is there to help enhance the understanding of SMSF terms and processes to the benefit of brokers and their clients. Most importantly, though, an experienced relationship manager is always on hand to help out whenever needed.

Q: What changes do you foresee occurring in this space, and what does the future hold for SMSF loans?
We have been experiencing an increasing volume of LRBA applications over the past year and a trend towards larger amounts, both of which look set to continue. The percentage of owner-occupied security properties is also increasing. In some cases this also includes a greater degree of complexity, so for many of our brokers this means developing a greater degree of expertise in this segment of the market.

Our view on this issue rather mirrors our own experience. Like many things that you start, they develop as you gain experience. With SMSF LRBAs, this includes structuring transactions to accommodate partners wanting to acquire their business premises, dealing with aspects of SMSF regulations such as ‘in specie’ contributions, and inevitably resolving split-ups in these business partnerships or relationship break-ups such as divorces. All of these are real added-value activities and can differentiate you in terms of the service you provide.

CB: There has been much conjecture about the future of SMSF loans since the Labor Party’s proposal to ban LRBAs by SMSFs to purchase property. This position received subsequent backing following the release of the David Murray-led Financial System Inquiry report back in December 2014, where a total ban on all borrowing within superannuation was recommended. The Turnbull Government rejected this recommendation; however, they have since taken steps to limit the amount of debt SMSFs take on to invest in property by including the leverage in their superannuation balance and transfer caps, which took effect from 1 July 2017.

“Any broker willing to undertake training and education for SMSF lending is capable of dealing in this space” - Cory Bannister, La Trobe Financial

There are no current foreseeable headwinds in the SMSF lending space from a legislative perspective, other than a potential change of government. With a federal election unlikely until late 2018, the next 12 months are unlikely to produce much change.

For brokers, the last 12 months have seen a number of lenders leave and re-enter the SMSF lending market, largely as a result of macroprudential regulation that has required the banks to curb their investment lending, of which SMSF forms a part. We expect this toe-in, toe-out environment to continue for many, and therefore would encourage brokers to partner with lenders providing a stable SMSF offering to provide a better experience for their clients.