Self-managed super funds have $28.6 billion of limited recourse borrowing arrangements outstanding, which means means that about 4 per cent of SMSF assets are financed with debt.
The value of SMSF borrowings increased 12.8 per cent over 12 months.
Most of that borrowing is used to fund residential and commercial property purchases but it is not limited to those assets.
SMSF trustees using LRBAs to fund property investments are being caught up in current round of tightening of lending conditions for investors. So it is important for trustees to make sure they are getting the best deal.
Canstar has compared 69 SMSF loan products. Its report shows that there is significant variation in loan rates. Variable rates range from 5.69 per cent to 7.99 per cent, with an average of 6.45 per cent.
Commonwealth Bank, Hume Bank and IMB were awarded the bulk of the five-star ratings.
CBA and Hume were rated five stars for their one-year fixed rate loan; CBA, Hume and IMB were rated five stars for their two-year, three-year and five-year offerings; and CBA and Westpac were rated five stars for the variable rate offerings (Canstar based its ratings on a $350,000 loan taken out in New South Wales).
Aaron Fuda, an SMSF lending specialist at financial planning group Omniwealth, says lenders offering LRBAs have reduced maximum loan-to-valuation ratios, reduced terms, tightened requirements for liquidity buffers and are asking for more documentation to demonstrate cash flow into the fund and fund earnings.
Fuda says lenders used to accept written advice about contribution levels from an accountant or planner but now they are asking for evidence of up to three years’ contributions.
Trustees should ensure that regular contributions are being made to their fund. Lenders want to see consistent contributions at a level sufficient to meet borrowing requirements.
“And ensure that all company, individual and SMSF financial and tax returns are up to date. The level of profit [net return], along with member contributions, will determine the borrowing capacity of the SMSF,” Fuda says.
He says that over the past 12 months the maximum LVR has come down from 80 per cent to 70 per cent. Lenders won’t deal with a fund that is smaller than $200,000 and they expect the fund to have assets other than the investment property.
“Lenders want to ensure trustees aren’t putting all their super in one assets,” he says.
Fuda says lenders will expect to see a liquidity buffer that can be used to maintain loan repayments in the event that the property is untenanted or provide funds for repairs and other costs.
The types of liquidity buffers he has seen in recent transactions include the equivalent of six months rental income and 10 per cent of the fund in liquid assets.
Fuda says it is becoming increasingly difficult to obtain a loan where members are over age 55. The ideal age is under 50 at the time of settlement.
