What is limited recourse borrowing

According to the Australian Taxation Office (ATO), self-managed superannuation funds (SMSFs) represent a very significant chunk of the superannuation market in terms of numbers and asset size. Approximately 1 million Australians manage their own super.

Borrowing through superannuation has also become increasingly popular over the past few years. The most recent ATO statistics show that the dollar value of SMSF lending has increased from approximately $1.4 billion in June 2011 to more than $21.8 billion in June 2016.

 

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Limited Recourse Borrowing Arrangement

SMSF loans are generally written as a Limited Recourse Borrowing Arrangement (LRBA) and the investment purchased with the money is held in trust for the borrower’s future provision. The most recent ATO Quarterly SMSF Statistics show that limited recourse borrowing arrangements have soared in value, from $1.4 billion in June 2011 to more than $21.8 billion in June 2016.There is certainly no doubt as to the popularity of borrowing in a SMSF.

Where does that money go? Property is the most likely suspect – both residential and non-residential.

During the period between June 2011 and June 2016, the value of total SMSF investment in residential real property increased by $9.8 billion and the value of SMSF investment into non-residential real property increased by $21.1 billion. Over the same period, SMSF borrowing increased by $20.4 billion.

SMSF loans are described as “limited recourse’ because if the loan defaults, the lender is limited to seeking compensation via the specific asset bought with the loan.  This means there is no recourse to the other assets held in the SMSF.

 

What interest rate do SMSF loans charge?

Canstar has researched and rated SMSF loans from 14 providers as part of its 2016 ratings. As at 1/10/16 the minimum, maximum and average advertised interest rates on the SMSF loans researched by Canstar were as follows:

 Table: SMSF Loans – Interest Rates 2016
Profile Average Min Max
Variable 5.65% 5.34% 6.08%
1 Year Fixed 5.42% 4.84% 6.20%
2 Year Fixed 5.32% 4.59% 6.20%
3 Year Fixed 5.38% 4.59% 6.20%
5 Year Fixed 5.62% 5.09% 6.20%

Source: www.canstar.com.au. Advertised interest rates are as at 1/10/2016. Based on loan amount of $350,000 and 70% LVR

You can compare current interest rates and fees on SMSF loans here.


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