CBA, the nation’s largest mortgage lender, is axing residential and commercial loans for self managed super funds amid growing concerns about regulatory problems, property market weakness and stricter capital adequacy rules squeezing returns.
The bank is set to announce it is pulling SMSF lending product, SuperGear, in a bid to “become a simpler, better bank and streamline our product range”, from October 12.
Westpac Group, the nation’s second largest mortgage lender, pulled out of the sector in July making similar claims about wanting to “simplify and streamline” its product range.
But the moves will shock mortgage brokers and financial advisers and make nervous property investors more jittery about the outlook amid falling prices, rising costs and oversupply, particularly for apartments in the inner suburbs of Melbourne, Sydney and Brisbane.
It is also being done during a period of increased regulatory scrutiny of leveraged superannuation assets, potential reputational risks to lenders and advisers from “high risk” single investment SMSF schemes, and lenders’ capital adequacy requirements.
“CBA has decided to withdraw its SMSF lending product that allows SMSF trusts to purchase both residentially and commercially secured properties,” a spokesman said.
“This is part of our strategy to become a simpler, better bank. We are streamlining our product portfolio and have decided to discontinue SuperGear.”
Support existing accounts
The bank said it will be writing to customers who hold a SuperGear loan outlining the changes.
It will continue to support existing loan accounts.
“We are seeing the writing on the wall for leveraged SMSFs,” said Sally Tindall, director of research for RateCity, which monitors rates for financial service products. “This calls into question the viability of the leveraged SMSF sector.”
Regulators fear problems arising from SMSF investors leveraging their superannuation to invest in a single residential property because of the lack of diversification and increasing dangers of loss in a falling property market where it is difficult to find tenants. Systemic risk is low because the loans are non-recourse, which means they are secured by the property.
The Australian Taxation Office and Australian Securities and Investments Commission are targeting the use of SMSFs to invest in property after a review revealed 90 per cent failed to comply with “best interests” tests and other legal obligations.
It warned the strategy of gearing through an SMSF to invest in property, which is heavily promoted by property seminars and “property one-stop shops”, is risky.
The one-stop shops typically involve real restate agents, developers, mortgage brokers, accountants and financial advisers.
A key finding of the David Murray-led financial system inquiry in 2014 was that leverage should be banned in superannuation funds to mitigate the risk of financial instability. The government rejected his advice and Mr Murray said that was a mistake.
Mr Murray, who was recently appointed chairman of AMP, the nation’s largest financial conglomerate, is expected to launch an internal review of its SMSF lending practices.
Banks are also believed to be quitting the sector because of increased capital adequacy requirements by the Australian Prudential Regulation Authority are squeezing profits.
The greater complexity associated with SMSF loans and relatively small size of the market are also disincentives, according to analysts.
“As banks are looking to streamline and reduce costs, these are the types of products that get reduced,” he said.
There are fears that legal restrictions – or caps – on how much an SMSF investor can contribute to their plans could cause a credit crunch for many borrowers and force fire sales of their properties, which becomes more likely as property capital values and yields slump.
This scenario could arise if the expense of renovating a property, or supplementing rental income, exceeded annual caps.
Lenders are also lowering their lending book risks by increasing scrutiny of borrowers’ income and expenditure in assessing their capacity to repay.
Other major lenders are also tightening their SMSF lending policies in addition to increasing rates on loans and other property-related credit.
Nearly $700 billion is held in SMSF funds by more than 1 million investors. During the past four years the number of members investing in property has increased from about 3.6 per cent to 6.9 per cent of SMSF fund assets.