In December 2014, David Murray, head of the Financial System Inquiry and former Commonwealth Bank CEO, presented his super report to the government. One of his recommendations was to ban self-managed super fund (SMSF) borrowing to buy property. (You can still smell the dirty tricks of the large super funds! They don't want to lose revenue with so many people withdrawing their super to set up their own SMSF).
Murray asserted in his report that SMSF borrowing increases risk in the financial system. The government is currently considering his recommendation.
I am sure you have read and watched the news regarding SMSF borrowing and property issues. The journalists, of course, have no idea how the system works. They studied journalism and communications at university – not accounting or finance! They are fed manufactured information by the financial system and PR companies that work for the big end of town.
I totally disagree with Murray and anyone who asserts that SMSF borrowing rules are risky and should change.
I am a passionate advocate of SMSF and property investments. When done correctly, as part of a well-planned investment strategy, I believe property in your SMSF will deliver long-term growth and security for your retirement. I have laboured over hundreds of intricate and comprehensive financial calculations for clients, who want to buy property and borrow in their SMSFs. I have always based these calculations on conservative figures (and worked out worst-case, best-case and neutral scenarios), and I can assure every client that the rent plus adequate super contributions will pay off the mortgage over a 20-year period. Many of my clients are paying off chunks of their mortgages and are five years ahead of paying their super loans.
I understand there are risks in investing. But there are also risks when people borrow to the max to buy their dream home – especially when banks are lending up to 95% of property values. Those buying their own homes could lose their jobs, too! Risk is part of life and we need to mitigate it. My risk analysis, financial strategy, property research, selection process and 20-year spreadsheet calculations ensure my clients make informed, intelligent financial decisions.
Remember, there is also risk in doing nothing and facing an impending retirement with not enough super.
Further adding to risk mitigation, I believe banks are more prudent in their lending to SMSFs than to other structures, such as personal home loans and investment property loans under personal names. For example:
1. Banks do not lend more than 70% of the value of the property to ensure there is a buffer.
2. When the banks work out how much they can lend you, they will base their calculations on the current interest rate + 2% (currently, the rate they use to work out if the SMSF can afford the property is between 7% – 8%).
3. The banks will only take 80% of the market rent into their calculations, anticipating either a decrease in rent or the property being vacant at some point during the year.
4. The banks will only take 85% of the super contributions that are usually deposited into your SMSF by your business/employer. They usually take into account the last financial year’s contributions. They work on real figures, not projections.
5. The loan the banks offer you is a limited recourse loan. If anything goes wrong, the bank cannot take your other super-fund assets. The lender’s rights are limited to the property being secured.
I love property and I love having my own SMSF. It’s the right of every Australian to make their investment decisions with the help of an independent, trusted adviser. Some people might think it’s OK for them to have their super in a big super fund managed by the big boys. I don’t think it’s OK. I am not waiting for another global financial crisis when I retire in 15 years, and neither should you.
You must become your own money manager. I urge you to take control of your financial future and consider setting up your SMSF, if it's appropriate for your financial situation. Get informed, get educated, and focus your priorities on the future.