Following 12 months of upheaval, leading lenders in the SMSF sector tell MPA what this specialised field now offers brokers
Since 2014’S Financial System Inquiry (Murray Inquiry), SMSF lending has been saddled with an image problem. The inquiry criticised SMSF investment in residential property, and while the government has not taken any action on this front, this did not stop many lenders pulling out of the space. SMSF lending was also hit by APRA’s crackdown on investment lending in 2015.
Despite all that, SMSF lending continues to roll forward. Australia’s SMSFs continue to grow, hitting a record $594.6bn in the December 2015 quarter and representing 30% of the entire superannuation pool. And while the regulatory focus has been on investment in residential property, many lenders say brokers should be looking at the commercial opportunities in SMSF lending, which can allow self-employed clients to acquire commercial premises. MPA has run plenty of articles on self-employed clients recently, and for good reason: these clients require a mix of commercial and residential finance and can become loyal repeat clients for brokers.
There is another reason to look at SMSF lending in the long term. Australia’s population is ageing: by 2030 one in five Australians will be aged over 65, according to Commonwealth Bank. The brokers who will service that market will have started doing so today, explains Darren Moffat, director of brokerage Seniors First. He told MPA sister title Australian Broker: “[What] brokers should look at, as a precursor to [the over-65 market], is to get into SMSF lending. SMSF lending is a good way to tap into the pre-65 market, so getting into the 50-plus market. If you get these clients early, then you can build a relationship and you have got them later on down the track.”
In this article Australia’s leading SMSF lenders explain the changes in the space and how brokers should approach SMSF lending today. Clearly, SMSF lending is not easy, nor is it a ‘quick buck’ – which is why our lenders talk in-depth about referral partnerships and client types, and spell out their lending conditions in the accompanying sidebars, although you should always check these conditions with the lenders directly.
Q: What’s changed in the SMSF lending market over the past 12 months?
A year ago, there were more lenders scaling back their involvement in SMSF lending than escalating or coming into the market, which in large part was being driven by the Murray Inquiry recommendation to reintroduce a prohibition on such lending. Notwithstanding the subsequent green light from the federal government, 12 months on and the trend of lenders reducing their offering or exiting the market entirely remains much the same. The situation has not been aided by recent budget measures impacting on the operation of SMSFs; these have only further clouded matters in an already-complex area of finance. For SMSF lenders such as Thinktank … volume levels are only continuing to increase.
There have been a number of changes over the past 12 months, partially driven by uncertainty over potential legislative changes as well as by the regulators’ focus on investment lending. While there hasn’t been any legislative change recently, there have been amendments to lending criteria – for example, maximum LVRs are now around 80%, and SMSFs need to have a starting fund balance above $150,000 to enable borrowing. The reduction in investment lending did reduce interest in property within SMSFs at the back end of 2015, but this year we are seeing a steady increase in SMSF lending enquiries.
There remains some uncertainty in this space due to some lenders’ cautiousness about the credit risk and that the policy by government may be modified. So far they have not made any changes, but funders remain cautious.
What has changed: the federal budget proposed superannuation tax changes for those with over $1.6m proposed to be taxed instead of tax-free, albeit still only at 0.15%. Will that be enough to make those with more than $1.6m use some or all of the funds to buy a property in their SMSF, and perhaps borrow some of the purchase price?
We are yet to see any great influx of SMSFs going out and buying up big, but this change may prompt a few more to consider direct property.
RESIMAC Financial Services
With SMSF lending secured by residential property obviously falling under the umbrella of residential investment lending, in early 2015 we saw some lenders alter SMSF policy and/or pricing and in some cases suspend the sale of SMSF loans completely, in order to slow their overall investment lending growth. RESIMAC [has been able to] continue lending in the SMSF space without the need to adjust lending policy or pricing.
La Trobe Financial
A number of lenders withdrew from the SMSF space entirely, which in part can relate to the product’s ‘investment’ status causing issues for ADIs due to APRA’s speed-limiting of investment lending growth being capped at 10%, to which SMSF lending clearly contributes.
The other aspect to this uncertainty was the Financial System Inquiry’s recommendations regarding changes to SMSF borrowings.
The government has subsequently ruled out these changes and SMSF can continue to borrow under an appropriate structure from a third-party lender. Much of the uncertainty around the product has now cleared, and we see the product continuing well into the future as part of an SMSF investment strategy.
OUR CONDITIONS FOR SMSF LENDING: Barrie Gaubert, CEO, Iden Group
Q: How can brokers find SMSF clients?
Up to 70% LVR is considered for residential; typically 60% for commercial.
Set-up costs vary but allow for more expenses than a normal residential loan. Legal fees are higher, and often there are settlement risk fees payable from the loan established.
Serviceability is based on proven income from the SMSF but can be supported by beneficiaries.
We have several funders, so each case is on its own merits. We don’t insist on a stated financial position at settlement in reserve, but again it is case by case.
You need to know your client, and your client’s friends. Survey your customers, or ask them if they know anyone that has their own SMSF. It is about segmenting your customer database. Those with an SMSF are most likely to know others in a similar situation, plus you need to get to know their accountant or planner who set it up for them. Firstly, you need to make sure their accountant is not in sync with another broker – a risk.
While traditionally the majority of SMSF trustees are over the age of 55, for funds established in the March 2016 quarter 75.1% of trustees were under the age of 55 and, interestingly, 42.6% were under the age of 45. Eighty-two per cent of all established SMSFs in the same quarter had a salary under $150,000 per annum, with more than 50% having an annual salary under $80,000 per annum. So, while it’s a very broad range, understanding the typical SMSF demographics and statistics available via the ATO would enable brokers to target both their existing database and new customers for new business opportunities.
La Trobe Financial
In terms of lead generation, a finance broker’s existing database should be their first port of call, mining their CRM to firstly identify clients who are self-employed and renting their business premises, as it can often make good commercial sense for small business owners to purchase their business premises. They can use cash flows from their business to pay their mortgage, as opposed to paying someone else’s by way of rent.
For new clients, brokers should contact their network of accountants and financial planners for leads in this space, as they are best qualified and often the source of recommending and establishing SMSFs.
RESIMAC Financial Services
Mining an existing client database in search of SMSF lending may not necessarily be the best strategy for a broker wanting to expand into SMSF lending. Instead, brokers should consider partnering with a trusted financial planner to whom they can refer clients as part of the overall financial needs assessment. If, as part of that needs assessment, the financial planner determines that an SMSF with investment in property is an appropriate strategy, the client will be referred back to the broker to complete the SMSF lending.
With existing clients, when conducting a review of their financial position or arranging new facilities for them, ask the question about their superannuation to find out if they have an SMSF or are thinking about setting one up. A focus on self-employed connections will most likely yield the best results, especially those owning or renting commercial premises.
Beyond current client lists, we recommend regular dialogue with accountants, solicitors and financial advisers, who will all have their own client networks who will be in need of various forms of finance from time to time. Reviewing asset and liability positions, perusing recent financial statements, and asking questions around property and wealth management plans are all good places to bring out useful information and pursue opportunities from there.
OUR CONDITIONS FOR SMSF LENDING: Jonathan Street, CEO, Thinktank
Q: Who should brokers partner with for SMSF lending?
La Trobe Financial
At Thinktank we extend SMSF finance for the acquisition of commercial, industrial, and retail property (non-residential, non-rural), as well as the refinance of existing SMSF loans, which is becoming increasingly common.
We lend up to 75% LVR on the personal guarantees of the members, with the option of a non-recourse available where the LVR is below 50%. Standard loan terms are 25 years, with the availability of 30 years upon request. Our serviceability assessment is a true, unstressed Interest Cover Ratio calculation with a minimum of 1.50x based upon existing SMSF net income plus annual member contributions and 80% of gross rental income produced by the property. A Statement of Advice from the fund’s financial adviser is generally sought, although we will accept alternative approaches where the underlying borrowers are sophisticated investors or the adviser will sign a certification.
We ideally prefer to see a minimum net asset position of $250,000 in the fund at settlement, and do not enforce any sort of liquidity ratio requirement.
[There’s a single] establishment fee which includes the cost of a commercial valuation and legal fees up to our published scales, along with all other associated costs, such as title insurance and settlement fee.
Accountants and financial planners are by far the best form of referral source for brokers, as brokers can take comfort in knowing that the clients have been qualified and deemed appropriate to undertake borrowings via this structure.
Developers and builders referring clients (purchasers) directly should be handled with caution as there can often be a conflict of interest. We would suggest brokers tread carefully with these and insist on evidence of financial advice before proceeding.
RESIMAC Financial Services
SMSF lending is not typically a loan product that is ‘offered’ to clients in the normal course of business. Clients seeking an SMSF loan have, in most cases, received advice from their financial planner or accountant suggesting they consider entering the SMSF market and consider property as part of the investment strategy within that SMSF. The client will then approach their broker for assistance with their SMSF financing needs.
Understanding all the parties involved in an SMSF lending transaction highlights the best business partnering opportunities. Accountants and financial advisers specialising in SMSF advice, establishment and administration are a great starting point. In a lot of instances accountants and financial advisers are happy to pass on the sourcing of the lending requirements of their SMSF clients to mortgage specialists.
Certainly regarding the compliance of advice stipulations, but also to be seen to be offering a holistic wider service to your customers, you need to be linked with planners and accountants.
I’ve come across many brokers who have excellent long-term associations that work both ways. Most do this on a business basis with disclosed incentives involved.
There is an enormous amount of potential in brokers looking to develop affiliations with other professionals, including financial advisers, accountants, auditors, solicitors and property conveyancers. The quickest and easiest place to start is with those relationships already servicing existing clients, just by asking for an introduction or picking up the contact details from information already to hand and, with consent, introducing yourself.
OUR CONDITIONS FOR SMSF LENDING: Daniel Carde, director product, marketing and strategic partnerships, RESIMAC Financial Services
Q: How can brokers make SMSF lending a regular part of their business?
Loan parameters: Maximum loan amount $500,000; maximum LVR 80% (LMI required when LVR exceeds 70%).
Loan purpose: Purchase of an investment property
plus costs; refinance of an existing SMSF loan plus costs (no cash out or consolidation).
Security: Residential properties must be completed homes or units over 12 months old, and cannot be purchased from a developer. Properties off the plan, serviced apartments, studio apartments and units less than 40sqm are not acceptable. Residential apartments which have a car space or storage area on a separate title that can be sold individually are not acceptable.
Serviceability: Two serviceability tests are applied, with the lesser of the two results taken: serviceability ‘inside’ the fund, where only the income and expenditure of the fund is considered; serviceability ‘outside’ the fund, where the income and expenditure of the guarantors/fund members is considered, including the rental income and proposed repayment associted with the SMSF propoerty purchase.
Additional requirements: The SMSF must hold minimum net tangible assets of $150,000 or more prior to the loan transaction; OR evidence that such assets exist in a standard/industry super fund will be accepted subject to the transfer of the assets to the SMSF prior to settlement. The SMSF must also have a minimum liquid asset (interest/ dividend-earning assets) balance of 10% of the total debts of the SMSF (including the proposed new loan) after the loan transaction is complete.
RESIMAC Financial Services
SMSF lending is not typically a loan product that is ‘offered’ to clients in the normal course of business. Clients seeking an SMSF loan have most likely received advice from their financial planner or accountant to consider heading down the SMSF path. The best way for a broker to ensure ongoing SMSF lending business is to partner with these professionals and form a mutually beneficial business relationship where the referral process exists as a ‘two-way street’.
For brokers wanting to enter the SMSF lending space, it is strongly recommended that they undertake one of the many SMSF lending courses that are available in the market today.
La Trobe Financial
Importantly, SMSF lending is a niche area and should only be carried out by brokers looking to deal regularly in this space. It is not suited to brokers who only want to process one or two loans each year. So, for those serious about making this a regular part of their business, we believe there is significant opportunity for them, which will continue to grow over time.
We would suggest brokers partner with a trusted referral source such as an accountant or financial planner to establish a steady supply of regular quality leads.
Get to know about how it all works: it is a different type of lending. A non-recourse loan at, say, 60% to a fully documented SMSF with mature investors behind the SMSF means you are dealing with higher-net-worth, savvy customers and their accountants and planners.
Every time a broker takes on a new finance application for a client, they should make a point of noting down what opportunities may exist both now and in the future, even up to five years away. Diarising to meet with clients on a yearly basis is a great idea as part of updating their current position regarding income, assets, business and consumer finance, superannuation and wealth management thinking and plans. Organising to meet them in conjunction with their accountant and/or financial adviser on specific issues can also bring opportunities to the fore.
Stay on top of what is happening in the SMSF industry, commit to the professional development programs conducted by the MFAA
and aggregator, and keep in touch with professionals in the SMSF space. Being well informed and maintaining an objective outlook is the best way to impress clients and provide them with value.
While brokers are unable to give advice to customers, a working knowledge of SMSFs will certainly give them an edge with potential business referral partners. Above all, brokers should let people know that SMSF lending is something they know well. A lot of SMSF trustees like to know that the person they are dealing with has a strong understanding of something they themselves are sometimes only just learning about.
OUR CONDITIONS FOR SMSF LENDING: Glenn Gibson, head of sales and marketing, AMP Bank
Regarding the property itself (talk to AMP for conditions related to the vendor, servicing, security and the SMSF):
• Must be an investment (ie it cannot be owner-occupied).
• Must be constructed and have its own separate title details (ie no construction loans) and established for more than six months prior to application. (no off-the-plan purchases).
• Must be zoned residential or rural residential (ie no part-residential, part-commercial is allowed).
• Must be fully serviced by power, water, electricity and sewerage and have road access.
• No company title, serviced apartments or display homes.
• No more than two residential units on one title.
• For strata title properties with more than one title and where registration of the transfer of the strata unit requires transfer of both titles, both titles can be used as security.
• The maximum land area is 2.2ha (5acres).
• We lend up to a maximum of 70% of the value of the residential investment property.
• An AMP SuperEdge loan can be used to refinance an existing SMSF loan with another financial institution, on a dollar-for-dollar basis only.
• An AMP SuperEdge loan cannot be used for renovations.
• We take a registered first mortgage over the residential investment property. No second mortgage or other kind of charge over the residential investment property is ever permitted.