Accusations SMSF borrowings are a danger to the financial system are misleading, with criteria to buy property in an SMSF significantly stricter than buying an investment property in an individual’s name, an industry executive has said.
“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 SMSFs are at risk of losing a large part of their retirement savings,” Omniwealth senior financial planner Andrew Zbik said.
“The fact that limited recourse borrowing arrangements (LRBA), under which funds borrow to buy shares or property, swelled from $21.5 billion to $25.4 billion between June 2015 and June 2016 – an increase of 18 per cent – looks scary, 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?”
The statistics seemed to suggest the economy was experiencing debt-fuelled rampant property speculation with superannuation money, however, it is important statistics are looked at in the context of the broader environment, Zbik said.
“The total value of residential mortgage loans in Australia today is approximately $1.73 trillion,” he noted.
“As at September 2017, total LRBAs in SMSFs amounted to $30.73 billion.
“Thus assuming most LRBAs are for the purpose of purchasing residential property, LRBAs within the super system account for up to 1.78 per cent of all loans.
“Actually, it’s not even that high because SMSFs also use borrowed money to purchase commercial property and shares.”
Zbik also highlighted the current value of the Australian residential property market is around $6.78 trillion.
“As at September 2017, the value of residential property within SMSFs was approximately $33.8 billion,” he said.
“SMSFs 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 SMSFs into perspective, this only accounts for 0.50 per cent of the value of all residential properties in Australia.
“Tell me, are these numbers problematic?”
Further, he underscored the strict criteria to buy a property in an SMSF, which was far tougher than buying an investment property in an individual’s name.
“That means most SMSFs are contributing up to 35 per cent to 40 per cent of the purchase price of an investment property in cash,” he noted.
“Investors buying investment properties in their own name are making nowhere near the same cash contributions to their purchase.”
He warned an LRBA strategy was not for everyone.
“I encourage clients need at least $200,000 in super before they even consider opening an SMSF – this is in line with the Australian Securities and Investments Commission’s guidance to the minimum amount needed to open an SMSF.”