Westpac made headlines this week after it announced it would scrap SMSF borrowing, with subsidiaries the Bank of Melbourne, St George Bank and BankSA following suit.
According to Riskwise Property Research, the move is more than just a purported streamlining exercise and highlights the underlying risks in the 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,” RiskWise CEO Doron Peleg said.
Noting that there has been a 200 per cent increase in the number of SMSFs looking to borrow to buy an investment property, Mr Peleg said the off-the-plan properties (OTP) popular with these buyers come with their own high levels of risk.
“The three major types of risks associated with over-supplied OTP high-risk suburbs are equity risk, cashflow risk and settlement risk, and they all add up to potential disaster for the anyone staring retirement in the face. Especially as set-up costs for these types of borrowings often have higher fees,” he said.
Further, market weakness led by oversupply issues can trigger rising defaults and lower valuations. This can also be exacerbated by tepid interest from families with children in renting an apartment.
“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’,” Mr Peleg said.
He advised that those considering buying property through an SMSF identify the potential loss of income from an oversupply issue to avoid the “accident waiting to happen”.