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A ban on personal guarantees for limited-recourse borrowing arrangements could see all institutions completely exit SMSF lending.
Thrive Investment Finance owner Samantha Bright said banks would have no recourse for loan defaults if the federal government implemented a ban on personal guarantees as a restriction on limited-recourse borrowing arrangements.
“I can’t see banks continuing to lend in this format if they didn't have personal guarantees, to be honest, because otherwise they have no recourse basically – they've got to get their money back somehow,” she told REB’s sister title SMSF Adviser.
Ms Bright said she has been informed that the banks already struggle with the use of personal guarantees to reclaim their money in situations where SMSF loans have defaulted.
“The rate of mortgages in default in these structures is extremely low, but they’re actually struggling with how they do reclaim these assets,” she said.
The lending limits imposed by the prudential banking regulator, APRA, are already shrinking the number of lenders that offer loans to SMSFs, she said.
“It’s not that the banks don’t want to lend; they’re being forced not to lend,” she said.
“Before these changes [from APRA], we actually had more players coming into the market and looking at these products. I actually had some small lenders asking me to look at the products they were planning to release.”
Ms Bright said that while it is good lending is now being limited to the most suitable SMSF borrowers, having fewer lenders has meant longer turnaround times and reduced competition.
“It’s gone from having a pool of lenders to barely a puddle,” she said.
“The appetite from the lender is still there, and if you jump ahead a few pages the lenders that are still doing SMSF lending are going to hit their APRA lending targets quickly, so we’re not sure how that’s going to play out.”
Some non-APRA-regulated SMSF lenders have also recently put their rates up, she said, simply because they are able to.
Ms Bright added that she is very concerned by SMSF investors who are buying property off-the-plan.
“If they've bought something off-the-plan that won’t be completed for another six months, I think they’re going to be completely shocked by what happens in six months because there may not be any lenders around by that time to settle their loan,” she said.
“I hope not, but you’ve got to be realistic. The [loan] volumes going through these lenders are huge and they’re going to be hitting their targets.”
[Related: SMSF property investment is ‘pot luck’]
