SMSF property loans “a high-risk endeavour”

As Westpac announces it won’t offer self-managed superannuation funds (SMSFs) loans for new consumer or business lending anymore, RiskWise Property Research’s chief executive, Doron Peleg, has warned that “buying property with your superannuation is an accident waiting to happen”.

The bank cited wanting to streamline processes by removing the product both from its own offerings and that of its subsidiaries, the Bank of Melbourne, St George Bank and BankSA as its reasoning for the change.

Peleg, however, believed that “the real reason is that offering SMSF loans … is beyond Westpac’s risk appetite, especially if retirees lose significant amounts of their pension due to failed property investment”.

“It really is a high‐risk endeavour, and, in fact, Labor will move to ban borrowing against SMSF if they are returned to power in the next Federal election,” he said.

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Despite this, the popularity of using superannuation to feed into property lending was growing, with Industry Super Australia reporting a 200 per cent increase in limited recourse borrowing arrangements over the last few years.

Research by RiskWise also showed that off-the-plan properties were very popular with SMSFs. The company warned that such properties often carry a high level of risk due to potential oversupply.

It cautioned that this could lead to “squashed property values, high vacancy rates and a cooler market”, pointing to inner-city Brisbane as an example of where weakness in the market had led to high levels of risk for investors and therefore lower valuations and rising defaults on settlements.

“What this means is that many individuals fall into debt they can’t climb out of as their SMSF hits the ‘rock bottom’ known as a ‘property bust’,” Peleg said.