Critics of limited recourse borrowing arrangements (LRBA) often cite the activities of residential property spruikers to taint the lending instrument more broadly, but the baby should not be thrown out with the bathwater, according to Thinktank.
The specialist commercial property lender’s chief executive, Jonathan Street, said while LRBAs have been growing rapidly, it is no reason to close this borrowing avenue, particularly in the non-residential sector where it has a strong track record for achieving both commercial and superannuation goals.
“We fully support ASIC’s (Australian Securities and Investments Commission) tough line on property spruikers who prey on the vulnerable by encouraging an unsupportable SMSF and corresponding LRBA,” Street said.
“But to ban LRBA’s entirely, thus denying many SMEs (small to medium-sized enterprises) and self-employed owners the opportunity to meet their commercial and superannuation ambitions, would simply be throwing the baby out with the bathwater.”
LRBAs play a crucial role for SMEs where owners are looking to align their business goals with their retirement savings objectives, he added.
He said his firm had financed 265 LRBAs since December 2013, with the current loan balance currently at $134.9 million at an average loan size of $548,000, and with the repayment type positively split between interest only at 21.5 per cent and principal and interest at 78.5 per cent.
The average loan-to-value ratio is 63.9 per cent and self-employed borrowers represent almost 90 per cent of the loan book, while owner-occupiers comprise nearly 60 per cent, he said.
“In our experience, supported by proper rigour and prudent lending as the numbers cited above highlight, SME owners who are motivated to take out an LRBA are only doing so after getting specialist advice to ensure it’s the right wealth management strategy for them,” he said.