Self-managed superannuation funds devour leveraged property loans

The use of LRBAs has grown wildly over the past decade, rising more than 10-fold from the $400 million level recorded a decade ago.

While major banks and mainstream lenders have withdrawn from the market because of regulatory concerns related to the sale of the loans, non-bank lenders are diving headfirst into the market amid a powerful upswing in house prices following the COVID-19 crisis.

David Murray’s 2014 financial system inquiry recommended banning limited recourse borrowing arrangements to “prevent the unnecessary build-up of risk”.

In its submission to the inquiry, the Australian Prudential Regulation Authority said it had “long had reservations about extending the ability of superannuation funds to borrow” as “additional direct leverage may amplify returns but exposes superannuation fund members to greater financial risks”. The proposal was the only recommendation the government did not adopt.

In 2019, Macquarie Bank, Commonwealth Bank and Westpac slammed the door shut on SMSF lending, ending any sales channel for limited recourse borrowing arrangements from a mainstream lender.

The decision was made as Labor went to the 2019 election with a promise to ban LRBAs.

However, that year the Morrison government snubbed a request from the powerful Council of Financial Regulators to ban property investment through self-managed super funds, following a three-year review of the market by the regulators and the Australian Taxation Office.

In its review to the government, the Council of Financial Regulators raised concerns that many low-balance SMSF owners had most of their savings tied up in a single leveraged property.

Investigations by the Australian Securities and Investments Commission also found LRBAs were often sold alongside questionable financial advice, with advice to set up an LRBA unlawful 91 per cent of the time.

The banking royal commission exposed several one-stop-shop advisers hawking SMSFs and borrowing arrangements for high fees, even when it would not be in the best interests of members to enter the schemes