APRA warns on SMSF mortgages

From the AFR:

The prudential regulator has told banks that they must not treat home loans to self-managed superannuation funds in the same way they do regular mortgages.

In a letter sent to banks and building societies on Thursday, the Australian Prudential Regulation Authority says that lenders must treat mortgages taken out by self managed funds as “non-standard” and consequently must apply an “appropriate risk-weight”.

There’ll be a much more to come on this baby…

37 Responses to “ “APRA warns on SMSF mortgages”

  1. Gunnamatta says:

    And how many bank managers and SMSF derived property investing types are thinking ‘Now you tell us!’

  2. Explorer says:

    So will APRA audit it in say 12 months to check whether banks have adjusted the risk weightings, or will they grandfather all existing loans in as complying?

  3. Revert2Mean says:

    Something has awakened the slumbering APRA monster.

    And what rough beast, its hour come round at last,
    Slouches towards Bethlehem to be born?

  4. littleguy says:

    Allowing people to leverage their retirement savings thereby risking both it and more doesn’t seem to be a good idea in the first place.

  5. Peter Fraser says:

    SMSF loans are fine as long as commonsense is used. Like everything in life they have their place.

    • bv2726 says:

      I agree. I also think that there would be some who may even be more risky with their SMSF money as they don’t have access to it, and may not for 30 years.

      I have had this thought cross my mind (the bottom drawer type of thinking). “Buy a house with my SMSF loan, rent it, sell it in 30 years when I retire…its gotta be higher value”…

      • Rusty Penny says:

        Well that’s a common strategy with people who own their own work premises.

        Mechanic, Dentist, etc, can make in-specie contributions of the property to their fund.

        Get an “arms lengths” valuer to opt for the highest market rate. Rent becomes something on top of contributions limits.

        Sell the property once in pension phase, and it is CGT exempt.

      • Peter Fraser says:

        The use that I see as most beneficial is for the self employed to buy their own office or factory in their SMSF and then pay rent to their own smaf scheme.
        The other allowable use is to buy the future retirement house which can be rented now and lived in after retirement.
        Speculation on housing with smsf funds would be a less used option IMHO.

      • Greconomics says:

        I hope you don’t give this advice to your clients Peter.

        A trustee/member of an SMSF cannot reside in a residential property (either permanently or temporarily as a “holiday home”) owned by their SMSF and cannot purchase/sell the property to themselves (or a related party) neither before nor after retirement. In specie transfers of residential property are also restricted.

    • Dichromate says:

      No they’re not ‘fine’, the bulk of the downside risk is carried by the taxpayer, since if everything blows up and these people get wiped out, they’ll have the public pension system as a recourse.

      The whole point of the superannuation system is to limit the number of people drawing on the pension system through forced savings. It’s probably too little too late now for the boomers since we really needed 15% across the board in the 1990s for them to actually have enough to retire on, but the system still needs to function for future generations.

      The ease with which people can take their super as a lump sum is bad enough, but letting people leverage their super to speculate on property is simply asking for trouble.

  6. AF says:

    Who do you think is currently propping up the ponzi / market with I.P. purchases.

  7. raveswei says:

    I thought the idea is behind superannuation is to force people to save not to force people to amplify speculation with leverage

    • forty-niner says:

      Agree.
      Instalment warrants might have a place within SMSF, but that’;s where it should end.

      • bv2726 says:

        So leverage is ok as long as its on shares and not property?

      • forty-niner says:

        Well, if I was pushed to choose I’d say don’t allow instalment warrants either, but I was thinking about how the original push for change to regulation was to allow SMSFs to purchase Telstra’s T3 Instalment warrants (which, at the time, seemed like a reasonable accommodation for the regulators to make).

  8. bg0 says:

    I don’t think that this will be a huge deal, because:
    - banks presently have plenty of capital, so a change to the allocation for loans into super won’t phase them
    - presumably they will get to make up the new risk weighting to attach to these loans, so they will end up being close to residential mortgages anyway
    - these loans are a tiny part of their book, but is one of the few segments where they can expect growth, so even if the changes are ultimately adverse, they will wear them because growing the loan book is the most important thing (for now)

    • Goldilocks says:

      And if banks had capital outflows, and shortage of capital then what? A genuine question.

      • bg0 says:

        Then these loans that require a relatively heavy capital allocation become less desirable, of course.

        Don’t get me wrong, I’m not saying that these capital adequacy changes will have no effect, I just dont think that the effect will be particularly strong at this time. SF mortgage lending hasn’t been around long enough and has not become widespread enough to matter.

        That said, it is another straw on the camel’s back, which doesn’t matter, until it does.

  9. raveswei says:

    What happens if SMSF defaults on mortgage with negative equity after home prices fall?

    • Peter Fraser says:

      An smsf loan is non-recourse – that is one of the differences in SMSF lending, although the beneficiaries might sign a guarantee – so the beneficiary can fail, but the smsf can’t – in theory.

      • AB says:

        What does the guarantee mean if the loan is non-recourse? (genuine question)

      • bg0 says:

        It means that the superfund can only lose the deposit it put down. If the sale of the property doesn’t generate enough money to pay back the loan, it can’t go after the superfund.

        If the bank has been given a guarantee by the beneficiaries/members of the superfund, it can chase them for the shortfall under the terms of the guarantee.

      • forty-niner says:

        Can Australian banks refuse to take back a title (as they can in USA), thus leaving the borrower’s name on the title and the borrower responsible for ongoing upkeep, rates etc.?
        http://www.reuters.com/article/2013/01/10/us-usa-foreclosures-zombies-idUSBRE9090G920130110

      • bg0 says:

        I’m not sure whether they can, legally, but from a practical point of view there would be little point – if the bare trust can’t pay the loan repayments, it equally can’t pay rates, etc.

        The superfund would still be shielded.

      • forty-niner says:

        So, in a scenario where the bank doesn’t want the building, that would leave the Council (i.e. ratepayers) to pick up the tab for ongoing maintenance and foregone rates?

    • [email protected] says:

      The RE and mortgage is held in a bare trust.Strictly limited recourse.
      The SMSF is one step removed

  10. Diogenes the Cynic says:

    Finally APRA wakes up. Now to apply a maximum LVR on all mortgages of say 60% and force banks to disclose their risk models online or disallow internal models.

  11. aj. says:

    It is almost beyond belief, that in circumstances where speculators and investors, fed by the debt machine, are massively corrupting the social purpose of housing that the government would open the gates further.

    I’m amazed that younger generations and those Australians of limited means abandoned in their own country aren’t going for the pitchforks.