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Starting this Friday (12 October), CBA will no longer offer its SMSF lending product ‘SuperGear’ for residential and commercial investments, citing a desire to become “a simpler, better bank” with a more streamlined product portfolio.
It’s not the only bank to make this move: Westpac stopped lending to new SMSF home loan borrowers in July and AMP has also announced it will follow suit by 20 October.
So what is this all about? Three non-bank lenders spoke to MPA about the change.
SMSF loans are more complex, and as brokers know, this is not something the banks are too hungry for right now.
This move by some banks to simplify their business models and focus on basic home loans doesn’t surprise Liberty’s group sales manager John Mohnacheff.
“SMSF lending involves a more specialised understanding of customer needs and the inherit risks, which are things that banks are not set up to do,” he said.
By concentrating on home loans, the banks can continue to rely on automatic processing, which is not as easy to do with SMSF loans, said La Trobe Financial’s vice president Steve Lawrence.
“The SMSF type product is a bit more complex in structure and more difficult to fit into [the banks’] automated credit model. We also believe that the banks may be required to manage their onerous capital requirements for these types of loans compared to a straight home loan for individuals,” he said.
Peter Vala, Thinktank Commercial Finance’s head of sales and distribution, echoes this sentiment. “SMSF lending is more process and detail oriented than any other type of lending and requires an intimate knowledge of what the SIS Act requires of all parties.”
“It would be extremely difficult to manage such a high level of compliance consistently across a vast retail distribution network and can open an institution up to issues that are then hard to resolve.”
While credit underwriting, origination and documentation around SMSF loans need to be tightly managed and controlled, he said, that doesn’t mean SMSF lending is risky or that brokers and borrowers should shy away from this option.
In fact, contrary to some press reporting, Lawrence said La Trobe Financial’s SMSF portfolio “has demonstrated stellar performance” and has proved to be low risk with high quality prime borrowers using this strategy to save and invest for long term retirement purposes.
SMSF lending is a legitimate way to help customers accumulate wealth and diversify their investments, Mohnacheff adds.
“Borrowing through your SMSF can be an effective way to invest in residential or commercial property. It’s also an effective way for brokers to diversify into new revenue streams,” he said.
“There is a perception that SMSF lending is harder than other forms of lending. But through partnering with the right lender, SMSF property investing can be simpler than expected and highly valued by customers.”
While the number of lenders willing to write SMSF loans has contracted, Vala says there’s still a balanced level of appetite from the non-banks and healthy competition among them.
“There are still a number of lenders very active in the market, so it remains quite competitive. New entrants are also likely to emerge as wholesale funding options continue to be strongly supported by domestic and global investors,” he said.
While it’s likely that other banks will withdraw from this market, all three non-banks said they’re committed to SMSF borrowers and the brokers who assist them.
“Within the current finance market for SMSF loans, brokers who have always relied on the banks for their lending needs will now have to consider looking at those non-banks in the market to meet their customers’ needs,” Lawrence said.
For those brokers who have clients with an existing SMSF loan with a lender that has since withdrawn from the market, Vala said they should keep a close eye on the interest rate they’re being charged.
“If it starts changing in an unacceptable way, consider refinancing, which is permitted under the Act and we are beginning to see more and more of it,” he said.
As for brokers whose clients may be thinking of taking out an SMSF loan in the future, he said brokers should stay in touch with their aggregator BDM who specialises in SMSF and stay in close contact with lender relationship managers who can help with individual transactions.