Self-managed super fund (SMSF) members have previously been able to borrow money through a limited recourse borrowing arrangement (LRBA). However, recent statistics show that SMSF borrowing has increased significantly over the past 5 years, which could be contributing to the housing affordability crisis.
LRBAs are the only way an SMSF can borrow money, but it means that the asset the money is borrowed to purchase is the security against the loan. If something happens and the loan is unable to be repaid, the super fund members and the other super fund assets cannot be touched. This means there are virtually no consequences for an SMSF if an investment falls through and they fail to repay the loan – not something the government wants to allow.
Why are SMSFs affecting the housing market?
As reported by The New Daily on April 28, SMSF borrowing in 2012 was $2.5 billion. In 2016, it was $24.3 billion – a tenfold increase. Most of that borrowing is going into property, both commercial and residential, which could be restricting the average person from getting into a home themselves.
While SMSFs can take out these inconsequential loans to buy properties for their superannuation investment plan, the regular home buyer will be restricted by their mortgage limits. This means they might not be able to pay as much for the same property, and will be forced to look elsewhere.
An LRBA for an SMSF has no consequences for the fund members (apart from them losing whatever they invested in when they borrowed the money). A mortgage for a regular home buyer does have consequences if it's unpaid, including losing the family home and any value added to it.
What is the government's plan to stop this type of borrowing?
The government recommends an increase to the super funds limit to $1.6 million.
The government recommends an increase to the super funds limit to $1.6 million. This means that any debts in an SMSF will be added to the total asset value, instead of allowing members to borrow in order to reduce the value of their total assets so they fall within the cap.
"This increase to an individual member's total superannuation balance ensures that it more accurately reflects the overall values of the assets in a fund that support the individual's superannuation interests," as stated in the draft legislation.
For more information about taking out your own home loan, or to talk about the best ways for you to get into the property market, talk to an advisor at CAPE today.
