Property clamp on super loans
IT’S getting a lot harder for self-managed super funds to secure loans for property. And that’s not 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 (SMSFs). 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 nonrecourse borrowing for SMSFs worked well while property values were rising. But as we’ve seen in recent months, the property market moves in cycles. After an extended run of strong gains, home prices in Sydney for example, have dropped 5.6 per cent in the past year alone.
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. And with their non-recourse loan terms, SMSFs are looking way less attractive than they used to.
As research group RateCity notes: “In a falling property market, it’s not surprising we’re seeing lenders retreat from this type of lending.”
Personally, I’m not upset about this. Superannuation has always been about building long-term wealth via compounding returns in a low tax environment. It is not about speculative gearing into property, which will go badly pear-shaped in any decent downturn.
We already enjoy big tax concessions in super on both our contributions and the returns our investments earn. I have always been against super funds gearing into residential property. We tend to own that in our own names anyway.
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.
We pay less tax today, which is a cost to our community. But in return we build a pool of assets and in time, draw less from the aged pension system. 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. Paul Clitheroe is chairman of InvestSMART, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.