Westpac has slammed the door on self-managed super funds, pledging to stop lending to them at the end of July. That effectively cuts off the supply of funds for SMSF property deals from the big banks.
It is a move that will dampen an already weak investment property market and comes after the ALP has pledged to outlaw SMSF borrowing if elected.
In a statement on Monday, Westpac said it would be “withdrawing from sale our SMSF Home Loan product and Business Lending to SMSFs, effective Tuesday 31 July 2018″. But it will continue to service existing customers.
As the biggest lender to the area among the big four, the move is a body blow to SMSF borrowing. “As far as we are aware, Westpac is the only major bank currently offering this type of lending,” the bank said.
NAB told The New Daily it hadn’t lent to SMSFs for residential property since May 2015 and ANZ no longer does.
Andrew Inwood, CEO of financial services researcher CoreData, told The New Daily “pressure from APRA has made it very difficult to lend to SMSFs. CBA put SMSF loans through business banking, which made it very complicated to get them approved”.
The drying up of bank finance is likely to significantly slow the growth of SMSF property lending that regulators have seen as problematic.
“Because SMSF loans are non-recourse (not backed by personal guarantees) there is an extra layer of risk for the banks,” said Angie Zigomanis, property expert with BIS Shrapnel.
SMSF property lending, while relatively small as a percentage of overall property lending, has been growing strongly in recent years leading to concerns that it was adding to the property bubble.
Limited-recourse borrowing arrangements by SMSFs trebled between 2013 and 2017 while residential property holdings doubled in value. Property lending rose from 17.7 per cent of SMSF assets to 20.3 per cent at the same time.
Even in the year to September 2017, LBRAs rose 13.4 per cent despite the APRA crackdown on investment property lending during the period. The restriction of SMSF lending is part of a larger move away from investment lending in recent times.
Mr Zigomanis said official figures for the first four months of 2018 showed that investment property lending was down 13 per cent compared to the same time in 2017. Annual lending totalled $129 billion for the year to April, compared to the peak of $140 billion in the year to August 2017.
Jordan George, researcher with the SMSF Association, said Westpac’s move was “the continuation of a trend of major lenders scaling back SMSF lending over the last two or three years”. However he said “it won’t affect the appetite of SMSFs for property investment too much”.
Most of the property bought by SMSFs is paid for by cash inside the fund rather than being supported by loans, he said.
Property adviser Stephen Lazar of properT network said lenders had tightened up loan-to-valuation criteria for SMSF loans in recent times. “It depends on how much you want to borrow; the market widens if you want to borrow 70 per cent, not 80 per cent.”
ASIC recently reviewed SMSFs and found that 90 per cent of the investment advice given to its sample group was in breach of the law. It found 22 per cent of members set up funds to buy property between 2015 to 2017, up from 19 per cent from 2011 to 2014 and some “were using it solely for this purpose without a wider investment strategy”.
“It is also concerning many people with an SMSF have not understood the importance of diversification, which puts their financial future at risk,” ASIC deputy chair Peter Kell said.