Westpac to introduce tough rules for lending to SMSFs

After interest rate hikes for investors, Westpac has now turned its attention to self-managed superannuation funds with likely changes including halving the maximum interest-only repayment term from 10 years to five.

SMSF property investors will be slugged with tougher rates, policies and processes in the lead up to this weekend's changes to caps on tax concessions being imposed by the federal government, The Australian Financial Review reported.

Westpac subsidiaries Bank of Melbourne, BankSA, St George, are also increasing mortgage rates for interest-only property buyers.

"This will help us meet our regulatory requirements and apply responsible lending practices in assessing a customer's ability to pay," a bank spokesman told the AFR.

Also, for a loan application, there has to be a minimum SMSF balance of $200,000.

"There are no exceptions to this requirement," the bank is warning clients.

SMSF trustees will also have to complete a new statutory declaration stating that customers have sought independent financial and legal advice when applying for an SMSF loan.

There are about 570,000 funds with about $654 billion under management and 1.1 million members, according to the AFR.

Borrowing – or gearing – for property by SMSFs has always been a debated issue because too much exposure to property could be a disaster in the event of a housing market crash.

A 2014 Financial Systems inquiry recommended that SMSF borrowing should cease.

Real property within SMSFs grew from $15 billion in 2003-04 to more than $100 billion by the end of last year, statistics from the Australian Taxation Office show.

Westpac changes, which are expected to be followed by other major lenders, will be imposed as the federal government introduces changes to concessional and non-concessional caps are introduced this Saturday.

That means the use of limited recourse borrowing arrangements will be included in a member's total superannuation and $1.6 million transfer balance cap calculations.

Lenders face higher risk with a limited recourse loan because it is debt in which the creditor has limited claims if a default occurs.

A typical SMSF property investor will pay about 5.85 per cent for a loan, which is about 135 basis points higher than for an investor loan outside a fund.

Over a 25-year term a borrower would make additional repayments of more than $270,000, assuming rates remained constant, according to analysis by Canstar.

Several other lenders have already restricted access to interest-only loans for SMSF by either no longer offering them or imposing strict loan-to-value ratios.

SMSF investors continue to increase exposure to listed trusts and other managed investments, latest analysis by the ATO shows.

For example, more than $207 billion is held in listed trusts compared to about $14 billion in 2012 as the global economy struggled to recover from the global financial crisis.

During that time cash and term deposits have fallen from about $134 billion to $28 billion.