SMSFs warned on risks of banks exiting LRBAs
Further exits by institutions from the SMSF lending space, could see “an influx of mezzanine lenders” that may result in higher interest rates for loans and greater risks for trustees, the SMSF Association has warned.
SMSF Association director of technical and professional standards Graeme Colley explained that the tougher prudential controls imposed on banks by APRA is seeing banks tightening up on their lending policies.
“Through these bank restrictions on loans, the market may tighten up and restrict it,” said Mr Colley.
“I think the complexity of [LRBAs] is one reason the banks [in some cases] have gotten out of it and the other reason is APRA tightening up on the lending criteria – that’s why we’ve seen CBA and Westpac increase interest rates.”
If all the banks and larger institutions leave the SMSF space, Mr Colley says this could mean “an influx of mezzanine lenders” that is likely to result in loans with higher interest rates and greater risks.
“The first [risk] is higher interest rates which could [require] greater security or a higher level of deposits from a superannuation fund so the greater security may be the other assets owned by members,” he said.
“The superannuation fund may have to make a greater deposit on the investment and that will mean dedicating more of its assets for the purchase of the property.”
In situations where the investment in the property goes bad, this could be a problem said Mr Colley because it will mean the deposit put forward by the super fund is partially lost because of the loan transaction.
“That’s something David Murray raised; he said that with LRBAs the risk is with the superannuation fund because the superannuation fund puts the money in and banks tie everything up and they’re going to ensure they get their money back,” said Mr Colley.
“So if the investment goes bad, the super fund loses out.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.