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Money Matters 24 September 2018

Posted September 24, 2018 by MoneyLink

Self-Managed Super Fund Challenges

In recent months all the big four banks have withdrawn from the business of lending to self-managed super funds. A few years ago they saw SMSF lending as an area of great potential, now they want out. This should prompt some SMSF owners to review whether they need a self-managed fund.

The implications

It seems the banks are fearful of being caught with non-recourse loans in a falling residential property market. SMSF loans must by law be non-recourse which means the lender cannot claim against other assets beyond the property if the borrower defaults. They must wear any losses.

The withdrawals leave a range of smaller players. Some are lending at just below six per cent, others are higher. This is about two per cent above owner occupied home loans. Fewer competitors means the rates they charge are likely to rise. Existing loans are also likely to be affected.

When do investors need and SMSF?

Investors need one if they want to invest their superannuation in unique assets such as residential, commercial or rural property, or antiques and collectibles. They also need one to buy shares in companies not traded on a share market.

All other common investments can be bought via public-offer super funds. Public funds provide broad diversification, including the purchase of individual direct shares in some cases.

Impact of the property market ‘slowdown’

Buying a property in an SMSF with borrowings is now less viable. Administration costs are already high. Now there are rising interest costs, weak rental returns and falling property prices in capital cities at least.

Rental demand in some areas is now slow and income yields low. There is an oversupply of rental properties as investors have rushed in during the rising market of recent years. Net income yields are around two per cent in Sydney and Melbourne, and three per cent in many areas, though higher in inland towns.

With the slower property market in the capital cities, and increasingly elsewhere, now is probably not a good time to buy residential property with super savings, though there may still opportunities in some country areas, and in Perth.

Should you consider selling?

People with existing SMSFs holding geared property could consider selling with the outlook as it is. Those close to retirement in particular will find rental yields won’t be high enough to fund their minimum retirement pension of five per cent per annum.

If SMSF owners with property do decide to sell there may no longer be any need for the SMSF. It may be better to roll super benefits over to an industry or public offer super fund. Many have been doing well. This may save costs and increase returns in coming years.

If you would like advice about your individual situation, talk to us.

This is general advice and should not be treated as personal advice.
Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd
ASFL No: 247360.

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