High interest rates propel growth in SMSF lending

Broker sees uptick in sector as investors chase higher returns

High interest rates propel growth in SMSF lending

Self-managed superannuation fund lending is on the rise as savvy investors seek better returns in a market affected by high interest rates and reduced borrowing capacity, says Matt Spears, the managing director of Sydney brokerage Evoke Capital.

The ATO’s latest quarterly statistics for SMSFs in Australia, covering the March 2024 quarter, show impressive growth in the sector.

In the last five years, the number of SMFS has grown 9% to 616,400, while the number of SMSF members has grown 8.2% to reach almost 1.15 million members.

In the March quarter, limited recourse borrowing arrangements (LRBAs) – vehicles which allow SMSF trustees to take out loans from third-party lenders – made up 7% of total estimated SMSF assets, with non-residential real property 10% of assets, and residential real property, 5.5%, according to the ATO.

Spears (pictured above), who was recognised as one of 25 brokers under the age of 35 to make the MPA Young Guns list in 2021 (now called Rising Stars), said Evoke Capital had seen more SMSF lending clients in recent times.

“We’ve seen an uptick in inquiries in the last 12 months,” said Spears.

“I think that’s purely driven by the interest rate environment. We’ve had borrowing capacity drop about 40% of the back of those rate rises, so individuals can’t borrow as much as they used to.

“Investors still want to invest and they believe that there's opportunity in the market. Self-managed super fund lending is a great way to add potentially a property or two to your portfolio because that assessment sits outside the traditional bank serviceability for a home loan or an investment loan.”

Spears said investors were looking at traditional super funds and weren’t happy with the returns and or were looking to diversify by using property as leverage to enhance their returns.

If a client had $500,000 sitting in their SMSF, they knew they had a certain amount of borrowing capacity based on serviceability which included mandated employer super contributions paid into their fund on top of their salary.

“If you’re getting $100,000 plus super, that’s $10,000 going into super,” Spears said. “So when the bank’s doing that SMSF calculation, it's that $10,000 plus the rental from the property that looks to firm up what you can borrow.

“It allows investors to bring in another couple of assets into their portfolio, to grow that asset base.”

Trends in SMSF lending

Spears said Evoke Capital had offered SMSF lending since the brokerage was established four years ago.

“A lot of business owner clients want to explore purchasing their own warehouse in super due to the tax benefits that come with purchasing that asset.”

Spears said the brokerage had both residential and commercial SMSF lending clients but commercial was now more prevalent now due to the higher yields.

“Investors are looking towards commercial property because regardless of the size, whether it's a $300,000 property or a $10 million property, the returns may be 5% to 7% depending on the location,” he said.

Spears said SMSF lending was a lot more attractive than what it had been historically.

When the banks exited the SMSF lending space following the banking royal commission in 2017 and the introduction of ASIC regulations, there were only two players – Liberty and La Trobe Financial – still offering SMSF loans.

With the rise of mortgage managers and alternate funders becoming accredited with aggregators, Spears said “we're seeing much more competitive interest rates for SMSF lending across both commercial and residential”.

SMSF lending was also simpler than it used to be, with lenders streamlining their processes, he said.

“There's a lot of quick refinance processes now, enabling you to move from one lender to another in a much more streamlined way,” he said.

New providers also offered offset accounts, which previously weren’t available, Spears said.

“You can't redraw on super fund loans, you can’t access equity in super, but now with offset you can essentially get that benefit, but still have the flexibility to use those funds to invest elsewhere,” he said.

“The rise of these new players is making it more attractive to invest via super. It’s not as cost prohibitive as it was three to five years ago and I think that's leading to more of an uptick in inquiries and usage as well.”

Evoke Capital worked a lot with mortgage manager WLTH for SMSF residential lending because it offered “a great tech stack, good internet banking and offset”.

Diversifying into SMSF lending

Spears encouraged residential brokers to embrace SMSF lending, saying “it wasn’t as scary as it’s perceived to be”.

“Brokers who are writing residential can absolutely write self-managed super fund loans, and I think it's probably a good stepping stone into commercial lending,” he said.

“The fundamentals of SMSF lending don't change from deal to deal … the structure is virtually identical across every SMSF deal.”

Spears said brokers should work with a great mentor who can lead them through their first few SMSF deals.

“It's a great gateway to expand your skill set and potentially look at more types of commercial transactions,” he said.

While brokers weren’t allowed to recommend SMSF lending to clients, Spears said if customers were looking to borrow brokers could explain what their borrowing limits would be if they took out a loan personally, through a trust or company, or through an SMSF.

“When we’re talking to a client about their ability to borrow, we’re proactively giving them options based on their position.”

When it came to assisting brokers with SMSF lending, Spears said it was up to the “lenders to educate and the aggregators to advocate”.

Evoke Capital’s aggregator, SFG, holds a range of training sessions covering differing types of lending, as well as an annual commercial conference.

Brokerage growth

Spears became a broker in 2020 after working at Westpac for 13 years in commercial, SME, institutional and private banking.

He set up Evoke Capital in 2020 when COVID hit but has grown the business successfully.

“Fortune favours the brave and we’ve been able to write $500 million of debt since we started,” he said.

Spears is the sole broker and leads a team of four. The brokerage offers residential and commercial finance, as well as asset finance and SMSF lending.

Have you noticed a greater interest in SMSF lending? Share your comments below