Interest rates driving SMSF growth for brokers

A higher interest rate environment and a desire for more financial control over retirement is driving SMSF lending growth, which is proving to be a boon for both brokers and lenders.

Australian Taxation Office data shows that in June 2024, there were a total of 625,609 SMSFs in Australia, an increase from 563,474 five years earlier in June 2019.

With a total of over 1.1 million members, the total allocation of assets to residential property in Australian SMSFs is now over $55 billion, an increase from $36.5 billion back in 2019.

Nguyen said SMSF lending popularity was likely due to the higher interest rate environment as investors looking to buy more properties are often limited by personal lending caps.

“SMSF lending doesn’t consider debts outside the SMSF, making it a useful option for investors wanting to expand their portfolios,” he told Australian Broker.

As well as overcoming serviceability issues, Nguyen said SMSF lending was being driven by tax reduction or retirement strategies, through accountant and financial planning advice.

Typical customers were middle to older aged investors, he said, with super balances of over $200,000, though You First Finance has also had a customer with a $150,000 super balance.

Financial controllers

Belinda Wright (pictured above right), head of partnerships and distribution – residential at non-bank Thinktank, said the lender had seen a notable increase in SMSF applications over the last 12 months.

The applications have been for both residential and commercial purchases and refinances.

“SMSFs continue to be established by both PAYG and self-employed members, with the primary focus being their future retirement goals and preferences,” Wright said.

According to Thinktank, more Australians are trying to get more control over their own wealth management during a period when super returns may not have met their expectations.

“The SMSF structure offers significant protection for property assets, along with compelling tax advantages during both the accumulation and pension phases of the fund,” Wright said.

SMSF investments into commercial properties are also growing; Thinktank said this is being driven by Limited Recourse Borrowing Arrangements (LBRAs), which allow an associated party— like a member’s own business—to lease the commercial property at market rent.

“This arrangement makes strong financial sense, as business owners can benefit from owning their premises and building wealth, rather than paying rent. As a result, we expect the commercial property asset class within SMSFs to remain on a growth trajectory,” she said.

S&P Global Ratings noted in its Australian RMBS and the Growing SMSF Factor report this year that SMSFs were becoming a more prominent feature of Australian RMBS transactions.

“This follows non-banks increasingly offering the lending product as they move to diversify their portfolios,” the ratings house said in the update.

A growing business

You First Finance has confirmed SMSF lending as a core part of its business. Recently, Nguyen shared that he was paring his business back to a focus on just residential lending and SMSFs.

The brokerage, instead of continuing on with writing asset finance and commercial deals, was doing this so that Nguyen could be laser focused on residential lending into the future.

Thinktank said there continues to be a significant opportunity in both purchasing property through an SMSF and refinancing existing SMSF LRBAs, and brokers could benefit.

“If your client has an SMSF, it’s worth reviewing their current loan arrangements, especially if their repayments have increased,” Wright said.

“Many older SMSF loans were written at higher interest rates and with shorter loan terms, resulting in unnecessarily high monthly repayments.

“Refinancing an existing SMSF loan could lead to lower monthly repayments, improving the fund’s cash flow.”