Why claims SMSF borrowings are a danger to the financial system are misleading

Once again, I have read claims that the ability of SMSFs to borrow money to buy property are a danger to the financial system and investors with SMSF are at risk of losing a large part of their retirement savings.

A first glance of the numbers presented to support this argument seem to imply that this is a big issue.

The fact that that limited recourse borrowing arrangements, under which funds borrow to buy shares or property, swelled from $21.5 billion to $25.4 billion between June 2015 and June 2016 looks scary. An increase of 18 per cent.

What about the shocking statistic that the amount borrowed to buy residential real estate doubled between June 2014 and June 2016, climbing from $6.3 billion to $12.2 billion.

These statistics seem compelling that we are experiencing debt fuelled rampant property speculation with superannuation monies.

It is important that all statistics are looked at in the context of the broader environment. The total value of residential mortgage loans in Australia today is approximately $1.73 trillion. [1] As at September 2017 total LRBA’s in self-managed superannuation fund amounted to $30.73 billion. Thus, assuming most LRBA’s are for the purpose of purchasing residential property, LRBA’s within the superannuation system account for up to 1.78% of all loans. Actually, it’s not even that high because SMSF’s also use borrowed money to purchase commercial property and shares.

The current value of the Australian residential property market is approximately $6.78 trillion. [2] As at September 2017 the value of residential property within SMSF’s was approximately $33.8 billion. [3] SMSF’s actually own more commercial property compared to residential properties coming in at $79.13 billion. When taking the total value of residential property purchased in SMSF’s into perspective, this only accounts for 0.50% of the value all residential properties in Australia.

Tell me, are these numbers problematic?

To buy a property with your SMSF today you will need to:

  1. Pay a 30% cash deposit. Whereas, in your own name you can leverage debt from other assets and borrow 100% of the purchase price of the property.
  2. Pay stamp duty from cash within the fund. Whereas personally, you can borrow money from the bank to pay for stamp duty. That’s right, borrow money to pay tax. Can’t do that in an SMSF; and
  3. Some lenders are requiring at least a 10% liquidity buffer when buying a property in a SMSF. This can be in the form of cash or other liquid assets such as shares. No such requirements if you are looking to buy a 100% leveraged property in your own name.

So you can see the criteria to buy a property in a SMSF are far stricter than buying an investment property in your own name. That means most SMSF’s are contributing up to 35% – 40% of the purchase price of an investment property in cash. Investors buying investment properties in their own name are making nowhere near the same cash contribution to their purchase.

This strategy is not for anyone. I encourage clients need at least $200,000 in super before they even consider opening a SMSF – this is in line with ASIC’s guidance to the minimum amount needed to open a SMSF.


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