A further call has been made to ban limited recourse borrowing arrangements (LRBA), with a property research group labelling the loans as “an accident waiting to happen”.
RiskWise Property Research chief executive Doron Peleg called for the Council of Financial Regulators (CFR) to introduce legislation to ban LRBAs for SMSFs as non-bank lenders move to provide loans previously supplied by the major banks.
Peleg said the move away from the provision of LRBA loans showed the major banks had acknowledged the risks, and despite non-bank lenders still providing loans, regulators should take notice of the risks and implement an industry-wide ban.
He noted, despite the risks, the CFR gave LRBA’s a boost when it did not restrict their use in late 2018 even though the 2014 Financial System Inquiry recommended the practice be outlawed.
“Lending to SMSFs is an accident waiting to happen as people gamble with their retirement funds,” he said.
“Super is the only asset class you can leverage against, but using it to buy property is definitely high risk if things go wrong.”
According to RiskWise research, off-the-plan (OTP) properties were popular with SMSFs, but many carried a high level of risk because of potential oversupply, which could lead to reduced property values and increased vacancy rates in a declining market.
“The three major types of risks associated with oversupplied OTP high-risk suburbs are equity risk, cash-flow risk and settlement risk, and they all add up to potential disaster for anyone staring retirement in the face, especially as set-up costs for these types of borrowings often have higher fees,” Peleg noted.
He added large commissions for property marketers were often built into the property price, increasing the level of settlement risk while also obscuring the fact the marketers were not independent.