FSI Ban on super borrowing
- Thread starter Hoffy
- Start date
A friend in APRA thinks this is long overdue
This is one of those "throw the baby out with the bathwater" ideas. SMSF resi assets have barely moved from around the 3% ( of all SMSF assets) mark since 2007 . In spite of all the hyperbole surrounding SMSF's somehow gobbling up property left right and centre- the data just doesnt back up the BS. SMSF's are just not borrowing huge amounts of money to buy property. Is it a growing sector? yes, barely though.
Loans to SMSF's are already limited recourse, limited LVR and service on just rent and member contributions. If this inquiry is motivated by a genuine concern about a trend towards too many new SMSF's with limited resources being established and then gearing up ( even though the ATO's data really, really doesnt support this as being accurate) simply make it mandatory to have a 300K balance for example before you can establish an SMSF, or make it mandatory to have no more than 50% of assets in resi property .... Just quietly, several of the banks are already self regulating in this space. Why? Cos the loans are limited recourse, are not underwritten by LMI and are near on impossible to securitise, so the banks ( well, most of them) dont really want too much of this business anyway! They cant farm out the risk like they can with full recourse, mortgage insured full doc loans.
Loans to SMSF's are already limited recourse, limited LVR and service on just rent and member contributions. If this inquiry is motivated by a genuine concern about a trend towards too many new SMSF's with limited resources being established and then gearing up ( even though the ATO's data really, really doesnt support this as being accurate) simply make it mandatory to have a 300K balance for example before you can establish an SMSF, or make it mandatory to have no more than 50% of assets in resi property .... Just quietly, several of the banks are already self regulating in this space. Why? Cos the loans are limited recourse, are not underwritten by LMI and are near on impossible to securitise, so the banks ( well, most of them) dont really want too much of this business anyway! They cant farm out the risk like they can with full recourse, mortgage insured full doc loans.
It's about borrowing full stop, not just for property. The concern is risk to the financial system. Not the property market.
I borrow in super and can't believe the govt allows it. If borrowing were to continue to grow at current rates for the long term, this introduces significant financial system risk as the government is underwriting the risk via the provision of income support in retirement.
I'm not surprised - its all about risk and the taxpayer.
Adding leverage to super portfolios can 'turbo charge' returns, but they do introduce further risk at the taxpayers expense. Given that the burden of failure is on the Gov't, the Gov't should have the right to control the level of risk taken by SMSFs.
Where the pin drops is debateable - although i'd guess that most at APRA and Treasury will agree with the FSI on this.
Cheers,
Redom
For property also Hoffy, or say shares via instalment warrants
What about the risk that those saving for retirement through super won't be able to keep up with the performance of leveraged assets held on the outside?
Seems likely to expand the gap in wealth equality if those with the least (only able to save for retirement in super) have to remain unleveraged.
I read the report last night. Murray makes a valid point about the loans not really being non recourse because the lenders all require guarantees in one form or another.
This has always been a bug bear of mine and it goes against the intention of the original relaxation of the rules.
I think they will just ban it altogether but a possible solution would have been to ban any lender imposing any sort of guarantees (even director's guarantees). Lend the fund the money not the people. The lenders would have then pulled the maximum LVR's back to 50% or left the market which would ease the concerns.
This has always been a bug bear of mine and it goes against the intention of the original relaxation of the rules.
I think they will just ban it altogether but a possible solution would have been to ban any lender imposing any sort of guarantees (even director's guarantees). Lend the fund the money not the people. The lenders would have then pulled the maximum LVR's back to 50% or left the market which would ease the concerns.
The problem is a small one. I'm not convinced it will get up. It might upset the electorate and not deliver any benefits.
The problem is the spruikers not the actual product. Too many people think a SMSF loan is easy. Its far from it. Unfortunately some spruikers are tarnishing for others. Often just a way to sell more cheap property. The problem is those seeking to buy a cheap property with a SMSF with $100K. They often commit all their super, lose insurances, have no buffer and have a high LVR which consumes the rental income AND contributions. All their cash get consumed in the deposit, duty, legals , bank legals and fees plus setup costs.
Many of these small funds cant sustain the annual costs and display very poor compliance. In my experience I see larger funds often do very well where they diversify and also commit a lesser LVR.
ASIC and APRA concerns are the spruikers too. They just push the smsf as a cash release to fund deposits etc. Kinda a lender of last resort issue. Industry Funds hate the competition (they would have SMSFs banned if they could). Banks don't care as its just another regulated loan product.
Personally I expect we could see growth in the widely held trusts again if a ban does get introduced. These are far riskier.
Marty's proposal has far more likelihood. Ban guarantees. Lower the LVR to around 50% as a consequence and a better position might occur without regulation.
The problem is the spruikers not the actual product. Too many people think a SMSF loan is easy. Its far from it. Unfortunately some spruikers are tarnishing for others. Often just a way to sell more cheap property. The problem is those seeking to buy a cheap property with a SMSF with $100K. They often commit all their super, lose insurances, have no buffer and have a high LVR which consumes the rental income AND contributions. All their cash get consumed in the deposit, duty, legals , bank legals and fees plus setup costs.
Many of these small funds cant sustain the annual costs and display very poor compliance. In my experience I see larger funds often do very well where they diversify and also commit a lesser LVR.
ASIC and APRA concerns are the spruikers too. They just push the smsf as a cash release to fund deposits etc. Kinda a lender of last resort issue. Industry Funds hate the competition (they would have SMSFs banned if they could). Banks don't care as its just another regulated loan product.
Personally I expect we could see growth in the widely held trusts again if a ban does get introduced. These are far riskier.
Marty's proposal has far more likelihood. Ban guarantees. Lower the LVR to around 50% as a consequence and a better position might occur without regulation.
Equities only for me.
I think it won't get up and if it does then it will be a long way away - think about the lobbying that will take place from the banks who have spent major $$$ introducing and refining a SMSF product - not only that the complexities of 'grandfathering' purchases off the plan which may settle 2 years later.
Final nail is - Libs said no changes to Super - this will be another broken promise.
We wrote a piece last night on our site, i'll attach the article here:
http://redwoodadvisory.com.au/will-smsf-borrowing-banned/
MODS - delete the link if inappropriate/ self promotion but I feel its ok, as it covers the topic ....
Cheers Ivan
Final nail is - Libs said no changes to Super - this will be another broken promise.
We wrote a piece last night on our site, i'll attach the article here:
http://redwoodadvisory.com.au/will-smsf-borrowing-banned/
MODS - delete the link if inappropriate/ self promotion but I feel its ok, as it covers the topic ....
Cheers Ivan
One of the reasons why we've maximised our borrowings in our super is over concerns that it might be wound back .
Cliff
Cliff
They will also likely be banned for -ve gearing eg margin loan facility. The easiest way to address -ve gearing will be to change the ITAA so that income cannot be reduced by any net financial losses.
- No property
- No shares
- Margin facilities
- Trust income using loan proceeds
A law change that says "property" wont work...Just use a trust. Then some trust may have a blend of property and non-property income. Treasury aren't dumb. This is about structural reform. Trusts etc still have to borrow. I don't predict a ban - Just a limit on total deductions.
They could merely pass a law change that defers the loss or some of it ?. Be far easier and mean no disadvantage to adjusted taxable income tests etc.
Or it could have a cap ? Retrospective ?? Doubt it but in the face of a tough Senate this may be easier. Phased out ?? Immediate ?? Who knows.
The SMSFs could have a problem. No lender pre-approves finance for OTP for a SMSF for this reason. There could be recourse if the sale doesn't proceed - If there is then isn't this a breach of s67A if the deposit is retained ?? Non-compliant funds ?
Or recourse against an adviser who assisted ? One of the OTP problems has always been that Govt said LRBs would be reviewed.
Banks didn't want to touch LRBs and only did so after extensive legal advice. They only do it since their competitors do it. Not a real serious % of the mortgage market. If its prohibited no issue.
