SMSFs warned on risk of ‘mortgage prison’

Mr James explained that some still trustees have limited recourse borrowing arrangements (LRBAs) that were established years ago when there was a scarce number of lenders available.

Competition in the SMSF loans space only really picked up a couple of years ago, he said, so the interest rates for these older SMSF loans can sometimes be higher.

“Interest rates are typically not as important to a trustee as they are to a Mum and Dad borrower. Superannuation funds tend to be very conservative and borrow at very low LVRs and often the rent will well and truly cover the repayments. So the rate rises aren’t stressing them as much [as other borrowers],” he noted.

“However, the banks have adjusted their rates since departing the market, and while interest rates might not have been top of mind for trustees previously, now that we’ve had a 2.25 per cent increase to rates, some of those interest payments are looking very, very high.”

Mr James said he is seeing interest rates for SMSF loans now reach seven or even eight per cent now.

This means refinancing is becoming a bigger priority for trustees, he said.

Where banks decide to exit a particularly market such as SMSF loans, Mr James explained that unless its extremely profitable, their approach is generally “to just cut the ties”.

This has led them to increase rates for these legacy SMSF loans above the Reserve Bank increase in some cases and implement out of cycle rate increases as well.

“There is a massive differential between an old legacy line and what a client can secure with much more competition available today,” he stated.

Mr James said second-tier lenders such as Mortgage Ezy have recently seen a spike in demand for refinancing as SMSFs search for better rates.

While SMSF borrowers tend to be more immune from the pressures that most people are feeling with the recent succession of rate increases, Mr James warned that this inertia could work against them.

“Obviously, with every rate rise, there is a buffer rate that needs to be added to the rate that they'll be paying,” he explained.

Responsible lenders needs to allow for further rate increases, he noted.

“So if you are refinancing today into a loan with a five or six per cent rate, well that will be assessed at eight or nine per cent. As loans through super funds are serviced by contributions, that becomes problematic the higher the rates go,” he warned.

“Some [trustees] may have difficultly refinancing if they leave it too late. We refer to that as being a ‘mortgage prisoner’ and the issue with being stuck in a legacy loan is that the banks or lenders don’t care if that client comes or goes because the administration for that small pool of loans that they’re no longer originating is quite significant for them.

“These lenders are likely to impose higher rate increases than the market anyway so [borrowers] kind of get a double whammy, so to speak.”