Yesterday’s letter from APRA to ADIs warning of higher risks associated with SMSF mortgages has been clarified. From Banking Day:
APRA said that for the purposes of its capital adequacy standard, APS 112, SMSF loans are “relatively more complex” than standard mortgages.
“As such, SMSF loans may have a different and potentially higher loss profile in comparison to standard loans,” APRA said.
In support of its position, it pointed out that the super fund was not the owner of an asset purchased with borrowed funds; it was the beneficiary under a separate trust structure.
Also, SMSF loans involve no recourse beyond the asset being funded.
Banks and non-banks in the business include AMP, St George, Westpac Banking Group, National Australia Bank, Commonwealth Bank of Australia, Rock Building Society and State Custodians Mortgage.
The AFR reckons that “the regulator has no major concerns with current practices”, despite the letter.
In short, APRA’s concerns are relevant to SMSF borrowers not in terms of the risks themselves but the higher capital charges that banks will incur and will almost certainly pass on to borrowers.
I fear the day when SMSF holders are able to use equity mate to buy property.
already happening.
Link please?
I am quiet sure its impossible to leverage on a property in a SMSF. To withdraw any equity you must sell it.
ah okay. that type of “equity mate”. misunderstood.
There is still the redraw facility available, which is the soft form of equity mate.
It’s a small part of the market, I’m sure that the banks can absorb this.
Of course they can. They are the government. Welcome to fascism.
I have an SMSF and I just can’t justify gearing an asset such as a residential property for investment purposes. The tax deduction for interest and outgoings is only 15%. Perhaps there is a school of thought that repaying the debt down with the $25k pa contribution makes it attractive. Be interested to know who is pushing this concept at the Banks and what type of investment license they operate under.
There are a few one-stop all-in-one (ie financial planner/mortgage broker/accountant) financial planning firms dedicated to this strategy. all 3 arms of the business working in harmony to gouge you with fees/underlying fees.
forgot to add the 4th executive arm which is the hidden/indirect property developer :O
Oh yes. And as someone whom has worked in most of those capacities (never in such a firm though) the fees are indeed as steep as they come. I spent more time talking people out of that strategy than into it that’s for sure.
I still see examples of ‘advice’ come across my desk that involves upwards of $10,000 for some mum and pa joe to purchase a resi property with a shinny new smsf for there $300k. And that’s before any commissions if the company also pushed the property (in my experience, at least another $10 to 20k!).
Interestingly this stuff is more the domain of your accountant looking for some extra income as well as your dedicated property sprinkler/wealth coach kinds. Your more traditional financial planning firms don’t seem tone as heavily involved in this.
oh and another interesting FYI. One of the biggest firms in this game (one owned by a large qld developer…..yet marketing itself as a financial planning practice with little reference to that operation) actually promotes individuals to “financial planners” based on their ability to “close” a specified number of cold calls (which involves them getting the client to join and education program… And then referring them onto the senior adviser who then closes the promptly purchase/financial plan deal.)mi had always heard this from individuals/clients related to the group and I thought someone had been watching a little to much boiler room, until I met a young lad from that very firm ever so excited about being a real financial planner…..having just reached his cold call quoter.
The 1980′s are alive and well.
This list has a number of repeated entries:
Banks and non-banks in the business include AMP, St George, Westpac Banking Group, National Australia Bank, Commonwealth Bank of Australia, Rock Building Society, St George (rpt), Westpac Banking Group (rpt), National Australia Bank (rpt), Commonwealth Bank of Australia (rpt), Rock Building Society (rpt) and State Custodians Mortgage
Most loans for SMSF buying property are set at 70% LVR maximum. I’m sure that the banks will find a way to use this to justify holding lower capital.
As for being more complex products, this results in more fees such as legal costs being charged to the customer.
80% is the standard now days. Very few institutions who say 70% are bleeding market share and will eventually move to 80%.
I don’t know why APRA is so worried – here’s my bid for quote of the day…
“Australians don’t feel comfortable investing their super in shares any more as they don’t have a guaranteed positive return,” he says. “Property is different. Regardless of what the market does, you can guarantee that property will always go up in price. It will always yield positive returns for investors, especially if they sit on the property for an extended period of time.”
see: http://www.theadviser.com.au/features/cover-stories/8177-the-growth-of-smsfs
Just ask the “septic tanks” whether property falls in value – and for that matter the Japanese and Europeans.
LOL – Australians are in denial and that is not a river in Egypt!!!
Phil