Self-managed superannuation fund trustees using limited recourse borrowing arrangements to fund property investments are being caught up in current round of tightening of lending conditions for investors.
Lenders offering LRBAs have reduced maximum loan-to-valuation ratios, reduced terms, tightened requirements for liquidity buffers and are asking for more documentation to demonstrate cash flow into the fund and fund earnings.
Aaron Fuda, an SMSF lending specialist at financial planning group Omniwealth, says lenders used to accept written advice about contribution levels from an accountant or planner but now they are asking for evidence of up to three years’ contributions.
Trustees should ensure that regular contributions are being made to their fund. Lenders want to see consistent contributions at a level sufficient to meet borrowing requirements.
“And ensure that all company, individual and SMSF financial and tax returns are up to date. The level of profit [net return], along with member contributions, will determine the borrowing capacity of the SMSF,” Fuda says.
He says that over the past 12 months the maximum LVR has come down from 80 per cent to 70 per cent. Lenders won’t deal with a fund that is smaller than $200,000 and they expect the fund to have assets other than the investment property.
“Lenders want to ensure trustees aren’t putting all their super in one assets,” he says.
Fuda says lenders will expect to see a liquidity buffer that can be used to maintain loan repayments in the event that the property is untenanted or provide funds for repairs and other costs.
The types of liquidity buffers he has seen in recent transactions include the equivalent of six months rental income and 10 per cent of the fund in liquid assets.
Off the plan purchases are more at risk than in the past, Fuda says. “In the period between exchange and settlement the banks can unrestrictedly change their policy to introduce new liquidity buffers. This can leave trustees with no option but to rescind on the property purchase or purchase in their own name.
“With banks tightening their credit policies, we could see the introduction of higher liquidity buffers and increased difficulty obtaining credit approvals.
“Trustees must have a contingency plan to protect them from the risk of bank policy changes.”
Fuda says it is becoming increasingly difficult to obtain a loan in your SMSF where members are over age 55. The ideal age is under 50 at the time of settlement.