Borrowing options for SMSFs vanishing
With both property and share markets under selling pressure, several financial institutions including the big four banks are withdrawing support for self-managed super funds wanting to borrow for new investments.
Funding is still available from a few small lenders but potential customers face higher interest rates and stricter loan conditions.
The fear of increased regulatory supervision and concern about legislative changes to prevent SMSF borrowings have triggered the decisions to stop new lending. In most cases, the difficulty of obtaining attractive funding for geared SMSF investments won’t create serious problems for investors.
It will make it more difficult for snake oil merchants to market questionable property investments to the unwary. Higher interest rates and tougher loan conditions will also encourage investors to examine alternative ways to gear their portfolios outside super.
Compared with negative gearing in personal names, borrowing in an SMSF is both complicated and not as tax effective. In personal names, interest payments and other losses generate a tax saving at the owner’s marginal tax rate, which can be as high as 48 per cent. In a superannuation fund, the maximum tax benefit is only 15 per cent.
It can be possible to pay off a loan quickly in an SMSF using tax deductible concessional contributions. This has helped small-business owners pay off the loan on their business premises and then fund their retirement by paying business rent to their own investment.
The situation is different for other investors gearing up their SMSFs merely to increase the return on their portfolio. In this case, the gearing especially for investment properties overweights the portfolio in one asset class and increases risks from not having a diversified portfolio. Particularly in the older age groups, losing capital from expensive borrowing costs or a poor choice of assets reduces the chances of funding a comfortable retirement.
As with other investment decisions, assessing the benefits of borrowing in a super fund is crucial for a successful outcome. For those with existing SMSF loans, given the low returns on cash and term deposits, paying off existing debt is a high-yielding and certain way of reducing risks and building assets. When the debt is paid off, fund earnings and new contributions can then be used to diversify the portfolio.
The situation is different for those still considering borrowing in their SMSF. This could be the last opportunity for small business to transfer ownership of their real business premise into their SMSF.