SMSF lending set to bounce back with a vengeance

Lenders are ready to reboot the Self Managed Super Fund market after attempts to shut down borrowing in the sector failed.

Self managed superannuation funds will not be shut down by government.

Lenders are losing no time jumping into the gap left by the major banks for self-managed super fund borrowing.

The $24bn industry has been in a hiatus for months as fears mounted the Albanese government would use its first budget to close down the entire sector.

But after the government clearly signalled SMSF lending would be left alone in next week’s budget, non-bank lenders are now moving to exploit the pent-up demand from some of the nation’s wealthiest investors.

Among the first to dive into the gap this week was the specialist lender Assetline Capital which is chasing what it calls “an opportunity of several hundred million dollars”.

The big four banks – ANZ, Commonwealth Bank, National Australia Bank and Westpac – virtually bolted from the sector after the Murray review in 2017 suggested SMSF lending should be outlawed.

Federal Treasurer Jim Chalmers is about to hand down the Labor Government’s first budget. Picture: Gary Ramage

More recently, pressure on government from lobbyists for the superannuation industry – like the Australian Institute of Superannuation Trustees – placed a cloud over the sector.

Big super funds had argued SMSF borrowing was too risky and could ultimately lead to so-called “systemic risk”.

There have also been concerns that some investors could be duped by property spruikers. No doubt this is true to a limited degree but on the other hand more than 1 million SMSFs quite reasonably need finance to pursue property plans.

An estimated 10 per cent of all SMSFs already have borrowings.

Fortunately, it seems the government has rightly dismissed the more specious arguments against SMSF borrowing as a case of special pleading by larger funds trying to marginalise the SMSF sector.

Assetline Capital – through the Horizon brand – now hopes to revive the SMSF market.

The lender’s co-chief executive, Nick Raphaely, says: “This is a specialist market where we could see very good business, where the major banks seem to find it all too hard.”

“The way we look at this segment of the market is that these SMSF borrowers are a good risk.

“The fact that every SMSFs is audited annually and that means there is an element of self regulation here.”

Assetline Capital co-chief executive Nick Raphaely.

Specialist lenders in the market such as Horizon – which has launched a 30-year mortgage on loan sizes up to $2.5m – will be competing alongside existing players such as La Trobe.

SMSF borrowers tend to focus on property – especially what is known as direct property, where the borrower owns the business which will occupy the building.

However, there is a growing volume of SMSF borrowing focused on general industrial and residential property.

The hottest sector is industrial property, where the shift away from retail shopping strips towards online commerce has resulted in the SMSF sector focusing on industrial warehouse properties in the $500,000 to $2.5m range.

At the upper end of the SMSF sector – 16,000 SMSFs have more than $5m – is very strong activity in light industrial property such as childcare centres and convenience stores, which have been selling at very keen prices.

The way it works for SMSF, loans known as limited recourse borrowing arrangements, cannot be mixed up between different properties.

There can only ever be one loan for one property. Under current regulations, SMSF borrowers must use elaborate legal arrangements, often centred on what are known as “bare trusts”.

However, the benefit of these arrangements is that banks can only repossess the property in question should an SMSF have difficulties. The rest of the asset portfolio is ring-fenced.

Lenders in the area are becoming more aggressive but they will still demand the SMSF member applying for the loan is making contributions.

In most cases that will mean that the members of the SMSF are still employed in some capacity.

Mortgage lending rates for SMSF borrowers are the highest in the market, with rates set above investment mortgage rates which are in turn higher than owner-occupier rates.