The worst advice I’ve heard about SMSFs and lending
2015 has seen many changes in the investment loan space and in particular SMSF lending. Unlike the years before, when changes meant product or policy innovation from lenders, the opposite has occurred this year.
As we get to the back end of 2015 it is good to see that lenders such as AMP Bank have re-entered the space and others like Macquarie have made favourable changes as well. As I commented previously most of the withdrawal from this market was due more to the APRA changes and not because the area proposed a more risky part of the market for lenders. In fact some have told me that SMSF loans, are some of the most profitable and well performing parts of lenders portfolios.
You’d think having options disappear for my customers would have been my main hurdle this year, but it wasn’t. When I look back I was actually surprised to see that the same issues keep cropping up again and again. These are my top ones.
1. Go and see your current bank
Whilst this appears a relatively small detail, this advice has cost many people loads of time and in some cases money.
Lender appetite in this space has changed. A customer with a full portfolio, home loan, savings accounts, business lending etc with XYZ bank will not necessarily meet their lending criteria for an SMSF loan (if they even do it). This is one time when not even a private banker will be able to save the deal. All have different minimum fund size, contribution history and affordability test.
If a customer does try to go it alone with their bank, I have seen instances where they were passed around the bank for more than three weeks, chewing into their finance clause, pushing back settlement dates and ultimately having to pay penalty interest for being late to settle.
2. Putting the cart before the horse
There have been many instances where customers have come to me with fund setup, ready to go. They have sought advice and have determined that property is they asset that they would like to invest in.
What hasn’t been done is any sort of assessment as to whether the fund would be able to borrow the amount they are looking for or qualify for a loan at all. If a trustee is set on investing in property and this has been a factor in their decision to set the fund up, you can imagine how they feel when I tell them that it’s not going to happen.
It is relatively simple to work out whether the fund would have capacity to borrow before anyone is too far down the SMSF track to ensure that the strategy is feasible. This is when the best financial decisions are made, when the customer understands what is required and makes an informed choice to move forward or not.
The smoothest transactions are the ones where this assessment has been done at the beginning of the process, so the trustees can make considered decisions about what they are doing about why they are setting up the fund and what it will and won’t be able to do with finance.
3. Property, Property, Property
The single most frustrating part of the process with SMSF’s and lending is undoubtedly property.
It also just happens to be the area that attracts the largest commissions and therefore the most unscrupulous players, so also poses a great threat to the uneducated trustees.
Finding the right property should be all about the performance of the asset and whether it fits the trustee’s investment goals. Unfortunately, I’ve seen this become a trustee ending up with a property that fits the agents or property advisor’s goals and not theirs.
In reality most of the conjecture around SMSF’s and property could be sorted if property advice for SMSF’s was regulated and required specific qualifications.
Time and again, trustees become caught up in the emotion of property and lose sight of the larger part of the strategy. Trying to keep them on track and to see the property as just an asset is tough. This becomes particularly difficult when their fund can’t afford the property they have their heart set on or if the security doesn’t fit lenders policy or fails valuation.
4. Experts that aren’t experts
This year I have had a record amount of ‘save us’ transactions. That is, where a customer has been with another broker or bank that has been unable to secure suitable finance for their SMSF purchase.
Somehow, they find me and without a doubt, when I step in to help the finance clause has expired, tempers are flared and everyone is fed up – lucky me !
In every case where this has happened, the initial application was handled by a finance broker or branch lender that has had little or no experience with SMSF lending.
Now to be completely honest, I couldn’t save them all. But it usually blindingly obvious to someone that knows what they are doing, that the application was never going to be approved. A ‘quick no’ whilst the transaction was in its early days, would have been way better that a protracted maybe and a subsequent decline.
Samantha Bright, founder, Thrive Investment Finance