Thrive Investment Finance owner Samantha Bright told SMSF Adviser that if the government decides to implement a ban on personal guarantees as a restriction on LRBAs then this will mean the banks have no recourse if the loan defaults.
“I can’t see banks continuing to lend in this format if they didn’t have personal guarantees, to be honest, because otherwise they have no recourse basically – they’ve got to get their money back somehow,” she said.
Ms Bright said she has been informed that the banks already struggle with the use of personal guarantees to reclaim their money in situations where SMSF loans have defaulted.
“The rate of mortgages in default in these structures is extremely low, but they’re actually struggling with how they do reclaim these assets,” she said.
The lending limits imposed by APRA are already shrinking the number of lenders that offer loans to SMSFs, she said.
“It’s not that the banks don’t want to lend; they’re being forced not to lend,” she said.
“Before these changes [from APRA], we actually had more players coming into the market and looking at these products. I actually had some small lenders asking me to look at the products they were planning to release.”
Ms Bright said that while it is beneficial that the changes are helping to limit lending to the most suitable SMSF borrowers, the smaller number of lenders has meant longer turnaround times and reduced competition.
“It’s gone from having a pool of lenders to barely a puddle,” she said.
“The appetite from the lender is still there and if you jump ahead a few pages the lenders that are still doing SMSF lending are going to hit their APRA lending targets quickly so we’re not sure how that’s going to play out.”
Certain non-APRA-regulated SMSF lenders have also recently put their rates up, she said, simply because they are able to.
Ms Bright added that she is very concerned by SMSF investors who are currently buying property off the plan.
“If they’ve bought something off the plan that won’t be completed for another six months, I think they’re going to be completely shocked by what happens in six months because there may not be any lenders around by that time to settle their loan,” she said.
“I hope not, but you’ve got to be realistic. The [loan] volumes going through these lenders are huge and they’re going to be hitting their targets.”
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In full agreement with views expressed below, just lower the LVR’s which whilst frustrating for those who may have had the wherewithal to handle higher LVRs will be a big net positive to the SMSF lending market overall. That will make them the strongest and safest loans in the financial system.
One thing troubles me though. Why did NAB completely withdraw from residential lending for SMSF’s? Why did they not just tighten up their product, even if it made it fairly uncompetitive. Is there some danger that NAB’s behaviour was a glimpse at the future? Anyone really know the nitty gritty of that decision?
My understanding is that LRBA’s are supposed to be non-recourse loans for SMSF’s, and personal guarantees breach the rules. Banks shouldn’t be seeking such assurances. They should just reduce the amount of the loan, and if the fund can’t manage to afford it, then the whole deal isn’t viable.
Have to agree with Graeme, the banks will just return to the lower LVR’s they were using before the introduction of personal guarantees.
How can the banks have “no recourse if the loan defaults.” They have a first mortgage over the property. Given that the LVR’s are usually 70% or lower that is a fair safety margin.
Their argument for charging higher interest rates and huge establishment fees was the “non-recourse” issue. Personal guarantees really mean that the loan is not a non-recourse loan as they can go after other assets to fully recoup the outstanding amount on the loan.
This sounds like noise to justify a rate increase.
Quoting I cant see banks continuing to lend in this format if they didnt have personal guarantees, to be honest, because otherwise they have no recourse basically theyve got to get their money back somehow,”
Don’t they have recourse to the asset; and if the LVR is 70% or less then aren’t they guaranteed to get their money back, plus a bit more? Why do they need a personal guarantee in the first place, particularly when they are generally not worth the paper they are written on?
Funny – I would have thought the very name “Limited Recourse” would indicate to the banks the risk involved. They compensate for this risk by charging higher interest rates.
I hope that personal guarantees are banned, and that the whole system of lending to Super Funds is abolished – it’s just not appropriate for this structure.
So full recourse borrowing arrangements will become limited recourse borrowing arrangements? LVRs will simply reduce to appropriate risk-weighted levels, but since the demand is for LVRs of over 90% then yes it will slow to a trickle.
(Part 3 of 3) Also – the widely touted non-cash tax deductions don’t compensate for the inflated price and excessive property commissions (like they supposedly do outside Super). Even outside a SMSF off the plan is (at best) a speculative investment that makes little sense to anyone not on the receiving end of the property commissions. Speculative investment in a single illiquid asset by a SMSF (especially where that investment represents the majority of the Funds value) demonstrates either very poor understanding by the Trustee or (more likely) massively conflicted advice. So, for mine bring on the ban on Personal Guarantees kill off a few more property spruikers and the Brokers who feed off them and leave the rest of s67A alone to do what it was originally intended to do. (end)
(Part 2 of 3) All a ban on Personal Guarantees should do is lower LVR to prudent levels for this type of lending (probably 60% for resi and 50% for commercial), ensure Lenders make a qualified assessment of the actual transaction and the merits of the SMSF rather than a lazy ‘look through’ at the asset and income position of the Members and – most importantly – bugger things up for the property spruikers selling over-priced properties off the plan. Btw – in my opinion there is no place for off the plan purchases by an SMSF. Wrong vehicle and hard to justify the zero return on the deposit money during construction. (more to follow)
(Part 1 of 3) One hopes Ms Bright has been misquoted (or poorly edited) – but to suggest that a Lender cannot recover from a SMSF under a LRBA – and to therefore support the Bank’s unconscionable insistence on Personal Guarantees – shows a stark lack of understanding of LRBA generally and of the original intentions of s67A (then s67(4)(a)) specifically. It is limited recourse lending – not non-recourse. The asset being acquired is subject to a registered 1st mortgage and held in a separate (from the SMSF) entity for precisely the reasons that the mortgaged asset is subject to full recourse. It is the SMSF that is subject to limited recourse – that is, its assets – other than the asset being acquired – are protected. (more to follow)
Standard knee jerk reaction if the Banks take this line. Would it not be a strategic move to remain in the market and adjust to smaller LVR limits if required. Would be interested in the actual levels of $ loss that the Banks incur based on 70% lvr.