It has been six years now since SMSFs were able to borrow to invest in assets and as a result, it is becoming much more common place. It is still a complex process to go through to secure a loan, but more borrowers now understand this, according to one major player in the market.
Speaking at the SMSF Professional Association of Australia’s (SPAA) technical conference, head of SMSF trustee distribution, Westpac Group, Sinclair Taylor, estimated that the size of the loan market in SMSFs was between $6 and $7 billion, of which Westpac Group has funded $2 billion worth of loans.
“We hold a reasonable chunk of that because we’ve been in the market since day one,” he said.
They also estimate that 30,000 SMSF funds are borrowers.
“We’re certainly keen to make sure borrowers are getting into [borrowing to buy property] for the right reasons.”
And part of that process is educating potential borrowers that the limited recourse borrowing arrangement (LRBA) is not the kind of thing you do in an afternoon, after you’ve made a bid on a property on whim.
“It’s getting borrowers to understand this is often weeks and months in the making to lead up to that loan,” Taylor said.
Westpac Group sees some interesting structures around loan requests but the majority of those approved are for residential property and non-specialised commercial property.
“Vacant land and rural property [we’re] not as interested [in],” Taylor said.
“We are really keen to understand the underlying performance of the asset that has been acquired.”
Bare trust or unit trust
Another tricky question SMSF trustees looking to borrow to invest in property may ask, is what is the best kind of trust to hold the asset in until the loan is paid out?
Also on the SPAA panel with Taylor was Belinda Aisbett, auditor and director of Super Sphere, who is definitely in favour of the bare trust.
“I’m a big fan of it being a bare trust…a unit trust complicates things, make its muddy,” she said.
“Also when you’ve a got a unit trust acting in that capacity, you’re really just creating problems in terms of in house assets”
It’s not impossible to structure a unit trust so that it complies; it’s just very, very difficult.
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Also in the Switzer Super Report:
- Peter Switzer: To fix or not to fix? [1]
- James Dunn: Seven sizzling stocks under 70 cents [2]
- Paul Rickard: How well has your SMSF done? [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
- Penny Pryor: Sydney still the star [5]