Westpac set to rock residential or commercial property market by pulling out of SMSF lending

by Duncan Hughes

The bank, the nation’s second largest mortgage lender, and its subsidiaries Bank of Melbourne, St George Bank and BankSA, will withdraw from lending to small super funds at this end of this month, following a review of funds’ prospects and its exposure.

The move has shocked mortgage brokers and financial advisers, who act as intermediaries between borrowers and the banks, but complements a change in lending strategy the banks have rolled out in recent weeks.

It will also make already jittery property investors even more nervous about the outlook amid falling prices, rising costs and oversupply, particularly for apartments in the inner suburbs of Melbourne, Sydney and Brisbane.

“We continually review our products and services to ensure they meet the requirements of our customers,” a Westpac spokesman said. Brendon Thorne

Other major lenders have also been tightening their lending to self-managed funds, in response to tightening regulations, toughening investment markets and the shift from investment to principal and investment products.

“We continually review our products and services to ensure they meet the requirements of our customers,” a Westpac spokesman said.

“In order to simplify and streamline our self-managed super fund products, we will be withdrawing from sale our SMSF home loan product and business lending to SMSFs, effective Tuesday 31 July 2018.”

The group will continue service customers with existing loans through switching loans and extending loan maturity. What the banks can do will depend on credit policy.

Highly risky

A recent ASIC reviewof 250 randomly selected client files and found 90 per cent failed to comply with the “best interests” test and other legal obligations. Jim Rice

Leveraged investment in superannuation products is a highly controversial strategy with industry leaders warning about scheme members creating too much credit and market risk by over-exposure to real estate.

More than 600,000 Investors have more than $700 billion invested in SMSFs, which is an amount bigger than Sweden’s gross domestic product.

About 4 per cent is invested in SMSFs, of which a large percentage is self-employed investing in their work places, such as surgeries, factories, ware houses or consulting rooms.

Regulators are increasingly fearful of systemic problems being caused by SMSF investors encouraged to leverage their superannuation and invest in a single residential property because of the lack of diversification and increasing dangers of loss in a falling property market where it is difficult to find tenants.

One of the key findings of the David Murray led financial system inquiry in 2014 was that leverage should be banned in superannuation funds to mitigate the risk of financial instability. The government rejected his advice and Mr Murray said that was a mistake.

Mr Murray, who was recently appointed chairman of AMP, the nation’s largest financial conglomerate, is expected to launch an internal review of its SMSF lending practices.

Professor Deborah Ralston, chairperson of the SMSF Association, said “there is a place” for property in SMSFs in a diversified, multi-asset investment strategy.

The Australian Securities and Investments Commission has also raised concerned about dodgy advice being given to unsophisticated SMSF investors.

“The strategy of gearing through an SMSF to invest in property, which is being actively promoted by ‘property one-stop shops’, is high risk,” the ASIC report said.

There are fears that legal restrictions – or caps – on how much a SMSF investor can contribute to their plans could cause a credit crunch for many borrowers and force fire sales of their properties, which becomes more likely as property capital values and yields slump.

This scenario could arise if the expense of renovating a property, or supplementing rental income, exceeded annual caps.

Tougher scrutiny on other borrowers

Westpac’s move could also herald a change in strategy away from risky investors to best new investor and owner-occupier fixed rate borrowers by offering discounts of up to 50 basis points and free international trips.

It recently introduced tougher scrutiny of borrowers’ capacity to service a loan across the proposed term by deeper analysis of their income and expenditure.

Their recent discussions with mortgage brokers indicate continued confidence in the property sector despite conceding greater borrower nervousness.

For example, it is offering borrowers limited term discounts of between 30 basis points and 50 basis points on principal and interest and interest-only loans of at least $150,000.

For example, five-year principal and interest repayments borrowers are being offered a 40 basis point discount of the headline rate of 4.09 per cent. There is a $395 annual fee.

One-year interest-only repayments are being offered with a headline rate of 4.39 per cent with a limited-term 50 basis point discount.

Borrowers are also eligible for enhanced Velocity frequent flyer points with a $250,000 loan earning a couple 200,000 points, enough for a return flight to Hong Kong, and a $1 million loan qualifying a couple to fly economy return to London from any Australian capital.

Other major lenders are also tightening their SMSF lending policies in addition to increasing rates on loans and other property-related credit.