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Commercial lender Thinktank has entered into the residential self-managed super fund (SMSF) limited recourse borrowing arrangements (LRBA) market.
Speaking with Mortgage Business, Thinktank CEO Jonathan Street said the lender had been entertaining the expansion for about 18 months, but “it took longer than expected to come to market”.
For six years, Thinktank has provided SMSF LRBAs secured by commercial property, approaching $200 million in finance outstanding.
While the expansion follows a number of withdrawals from the SMSF residential market in recent months – by lenders such as CBA, NAB, Westpac, AMP, and Macquarie – Mr Street said the timing is coincidental.
“It just so happened that as we were in the final stages ahead of the release of the product, both Westpac and CBA announced they were pulling out, and they have been followed progressively by the remaining ADIs, although several do still actually offer LRBAs to limited segments of their client base,” he said.
The Thinktank chief executive admitted that, thanks to the outgoing banks, there is an “even greater market opportunity” for a “pragmatic and experienced lender to assist well informed, well advised borrowers with their own long-term wealth creation plans”.
Mr Street said it is understandable why SMSF lending “isn’t suited to the major banks and larger ADIs”.
“It is a finance product that must be centrally and tightly controlled in terms of the implicit regulatory requirement for strict compliance on the part of everyone involved in the provision of a limited recourse loan from the fund members, to the trustee/s, the broker, financial adviser, accountant, legal counsel and at all times, the lender,” the CEO explained.
According to the chief executive, it would be “almost impossible” for big banks and ADIs to ensure policies and procedures have been followed and applied in every deal.
“Without clear operational guidance and then consistent execution on keeping everything in sync and being able to competently deal with the questions and complexities that inevitably arise in this type of lending, mistakes will be made, non-compliance will occur, and additional costs will arise,” Mr Street said.
Recently, the government said it would not make any changes to limited recourse borrowing arrangements held by SMSFs, after the Council of Financial Regulators (CFR) and the Australian Taxation Office (ATO) found that they are “unlikely to pose systemic risks”.
However, Mr Street acknowledged that there have been reports of instances where the interests and motivations behind LRBA finance applications may have been “inherently conflicted”, investment strategies were “negligent”, and the types of property used as security were “fundamentally ill-suited to small balance SMSFs including concentrations of off-the-plan, inner-city high-rise apartments”.
The CFR and ATO had expressed concern over the “prevalence of property as the main asset purchased” under an LRBA, noting that the purchase of property as the main asset is “most commonly by low-balance SMSFs (those under $500,000)”, which have “little investment diversification and high LVRs”.
Mr Street suspects that the banks have concluded that residential LRBA lending sits “at the periphery of their main businesses” and contributes “little to the bottom line”.
Additionally, as some of the properties secured are “less than ideal”, the banks probably found it “too difficult to keep their entire branch and distribution networks in check, causing issues for verification of compliance, and, given the intense regulatory and political scrutiny, it just wasn’t worth the trouble of battling on with.”
The banks’ decision to exit the market, according to Mr Street, could be further validated by the possibility of a Labor government banning SMSF LRBAs if elected, a move that the Financial System Inquiry recommended in 2014.
The Thinktank CEO noted, however, that it’s residentially secured LRBAs that are under scrutiny, rather than those secured by commercial property.
“Business operators are typically financing their business premises via their super fund and pursuing a very tax-effective wealth management strategy squarely aimed at best supporting themselves and their families in retirement,” Mr Street said.
“Around one in five of our new loans each month is for this purpose and, as far as this part of our portfolio performance, we have no current arrears, almost no historical arrears, no losses, and over 80 per cent of borrowers are on [principal and interest] repayments in line with their retirement plans.
“It is an incredibly high-performing commercial property portfolio.”
[Related: ‘Systemic’ SMSF lending risks quashed by regulators]
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