Exploring alternative financing options for SMSFs
With the major banks largely tightening lending requirements for SMSF property loans, what are some of the alternative models for property investment and finance emerging in the market?
Lending limits imposed by APRA on the major banks has seen them tighten the restrictions for property loans to SMSFs in recent years or, in some cases, withdraw from the SMSF lending space altogether. ANZ has ceased all activity with SMSF lending, while NAB announced in 2015 they would no longer provide loans to SMSFs for residential property.
Omniwealth managing partner of mortgage and finance James Grima says while banks such CBA, Westpac and St George remain active in the SMSF lending space, they have been forced to tighten lending standards for their SMSF loans. Last year, APRA started to put more pressure on the investment property market through the banks, requesting larger amounts of money be held in reserve, Mr Grima said.
“A lot of lenders reduced loan-to-value ratios down to 70 per cent on the residential side and wanted some sort of cash component or liquid asset component in reserve, generally around 10 per cent, depending on the lender.”
According to Thrive Investment Finance owner Samantha Bright, most of the major bank lenders will no longer offer loans to SMSFs with fund balances less than $200,000. She said this restriction came in response to guidance released by ASIC in 2015 suggesting that establishing an SMSF with less than $200,000 may not be in clients’ best interests.
Given the nature of the market at present, it’s a significant challenge for SMSFs with a balance of $200,000 and under to secure a loan, Ms Bright said.
"If you don’t have $200,000 in your fund, it’s a really tough exercise,” she said.
Some of the recent restrictions to SMSF loans have, therefore, made obtaining finance for property investments or accessing the property market altogether through the traditional channels challenging for some SMSFs. The emergence of non-bank lenders or speciality finance providers, however, has seen the number of options for SMSF loans expand.
Mr Grima has used specialty finance providers to access loans for SMSF clients who would not have met the major banks’ lending criteria.
“[The lender we use] is a bit more generous in terms of what they will assist with. For example, if you’re a 60 year old with five years left to work, [the major banks] really do question why you’re buying a property in super. They probably wouldn’t touch that,” he said.
Mr Grima said he does not trust many second- or third-tier lenders, as he is concerned about funding issues and compliance.
“We just want to stick to reputable, larger organisations. We don’t want to get caught up in potential issues around compliance or problems that fund may have,” he said.
“We’re in a very sensitive part of lending, superannuation, so we just feel that we want to go with the strength.”
Some crowdfunding and peer-to-peer lending companies launching into the market have also provided SMSF trustees with more options for investing in property or obtaining finance for property.
Adam Broder, the chief executive of Peer Estate, a peer-to-peer real estate platform for debt, said there are two main types of real estate investment and finance platforms at the moment – the crowdfunding models and the peer-to-peer lending models. Peer-to-peer lending is the provision of loans that are secured by property, whether it’s for property developers, property owners or property investors, he explained.
“They’re secured by property and by the mortgage on the property. So it’s very similar to someone buying a house, and they go and get a mortgage for say, 70 per cent of the purchase price. The [platform] allows investors to invest in that 70 per cent with the knowledge that the owner has the equity piece of 30 per cent,” Mr Broder said.
“So the only return the investor gets on [the] platform is the interest rate on the loan.”
While this means investors who are investing in the loan do not get the upside on any change in the value of the property, they are also protected against any downside with changes in the value of the property because they’re only invested in the actual loan or mortgage.
Although some peer-to-peer lenders do offer finance to SMSFs, the real interest in the peer-to-peer lending space among SMSF trustees lies with investing in loans, as opposed to borrowing, Mr Broder said.
“We’ve found that a lot of our investors [who are investing] in the debt are actually SMSFs.”
Other groups and companies operate more in the equity space and allow SMSFs to invest in part of a property rather than the whole property if they do not have sufficient equity to purchase the whole property.
Mr Broder said the SMSF investor may decide to own 10 or 20 per cent of an apartment through a fractional property investment platform.
“In that scenario, that SMSF has direct access to the change in value of the property, so if the property goes up in value, they share in that return,” he said.
“They are effectively a part owner. They share in the return based on rent, the costs based on maintenance and they basically own the property outright, but it’s just a fractional share.”
These types of platforms are providing smaller retail SMSFs with different ways of accessing returns from property investment without having to own the property directly. They also remove many of the problems that come with owning a property directly.
“If someone owns a property directly, there is obviously stamp duty on the way in, but more importantly there is dealing with tenants, there’s dealing with vacancies, there’s maintenance, there’s dealing with real estate agents. There’s a whole range of issues that go into managing a property,” Mr Broder said.
“This suits some people, but others may not have the time or inclination to manage that, and through these kinds of platforms, some of those headaches are taken away and looked after by other people on your behalf.”
The other advantage of either investing in property debt or through the fractional property model is diversification.
“Rather than taking all your equity and putting it into one property, you can diversify it across the part-ownership of two or three different properties and invest in the debt of another two or three properties,” Mr Broder said.
“It gives you geographic diversification and it gives you income diversification.”