As Australia’s banking regulator continues to force finance lenders to tighten their lending standards, we take a look at how SMSF loans have been affected.
Lending via self-managed super funds (SMSF) began in 2007 after regulations where changed to allow SMSF’s to borrow money for investment purposes.
However, under the Australian Prudential Regulation Authority’s (APRA) recent crackdown on investor loans, borrowing via SMSFs to purchase an investment property has become much harder.
APRA’s changes to investor loans are designed to cool the residential property markets in Sydney and Melbourne, where house values have skyrocketed on the back of record-low interest rates and high demand from property investors.
As part of the changes, finance lenders are required to adhere to a limit of 10% growth in investor loans as well as hold more capital on their books.
The latter has led to many lenders completing billion-dollar capital raisings in recent months and, more recently, raising interest rates on some loan products, including SMSF loans.
Some lenders have backed out
Following APRA’s changes, some lenders have withdrawn SMSF products altogether.
Those lenders that have remained in the space, though, have been forced to tighten their loan requirements, meaning applicants must meet much stricter criteria.
The changes differ from company to company, however, most lenders have reduced their loan-to-value ratio (LVR) from 80% down to 70% for SMSF loans.
Lenders that have left their LVRs at 80%, though, have stopped offering interest-only loans, and applicants must make principle and interest repayments.
Some lenders are also requiring a minimum starting balance in the fund before a property can be purchased.
Additionally, some lenders are demanding SMSFs have some capital invested in different assets other than the property being acquired.
For example, a $400,000 property purchase at a 70% LVR with a $280,000 loan amount would require the fund to have a minimum of $28,000 left over after all purchase costs.
Amid these changes, it’s important for investors considering purchasing property through an SMSF to seek advice from brokers and financial planners who specialise in this area.