Entrepreneurial lender Macquarie Group has abandoned the self-managed super fund lending market, making it the last of the major institutions to drop the business.
In a move that casts a pall on the state of the property market, it has also pulled the plug on “the bank of mum and dad” saying it will no longer make loans backed by parental guarantees.
Macquarie said in a note to mortgage brokers that do business with the bank that “we’ll no longer be offering family guarantee loans from 18 March 2019, and SMSF residential home loans from 30 April 2019”.
Other big lenders left early
Macquarie was therefore the last of the major institutions pulling out of the SMSF lending market.
ANZ was never involved, NAB pulled out in July 2015 while CBA, Westpac and AMP withdrew in the September quarter last year.
But despite the big guns pulling out, SMSF lending arrangements in place actually increased last year.
While the big banks have departed the scene, smaller non-bank financial institutions like Liberty Financial have remained in the game.
A mortgage broker, who did not want to be named, told The New Daily “We are still doing SMSF lending, but it is not as prevalent as it was before the big banks stopped lending”.
SMSF property lending is carried out under limited-recourse borrowing arrangements. That means that if things go wrong, the bank can only chase the borrower for the value of the actual asset lent against.
Other assets inside and outside the super fund are safe regardless, and so the LRBAs are a creature of boom times. If property prices fall, the banks face losses as they can’t draw on other assets to recoup the loan in full.
Systemic stability threatened
Brendan Coates, a research fellow with the Grattan Institute, said the Murray review of the financial system in 2014 had recommended the loans be scrapped, but this had been ignored.
SMSF lending “would not be good for the stability of the financial system if it got too large and there is not a strong case for allowing it”.
“The risk is you are concentrating your retirement nest egg all in one basket, and if you use debt finance it can go south pretty quickly,” Mr Coates said.
Martin North, principal of Digital Financial Analytics, said the declining property market would spell the end of SMSF borrowing.
“As the property market falls, people will not be able to find finance for SMSF lending,” Mr North said.
And fewer people will want to do it.
“As property values contract, no one is going to want to bet the house on the value of the house,” Mr North said.
Macquarie is the first of the majors to get out of ‘bank of mum and dad’ lending, but it won’t be the last, Mr North believes.
Macquarie moved first because it has a unique model that requires parents to move their mortgage to Macquarie when they guarantee a loan for their children.
However, pressures of a falling market will affect other lenders too, Mr North said.
“Parents can be sitting on a lot of equity in their house and decide to lend part of that to the next generation,” Mr North said. “If their own property starts to fall in value, they could start to regret it and it could affect their retirement.”
Angie Zigomanis, property expert with BIS Oxford Economics, echoed the sentiment.
“It could change parents’ lives and leave them on the hook,” Mr Zigomanis said.
Until recently, about half of first-time home buyers were financed using a parental guarantee. However recent figures showed that this was declining, Mr North said.
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