S2E17 - Changes To SMSF Lending: Why the New Rules Might Be a Blessing in Disguise

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[00:00:00] Imti: Today we're gonna talk about the recent SMSF changes around borrowing for residential property, and more importantly, how they might impact you and how to think about them properly, because there's a lot of misinformation going out and a lot of people are very quickly going into panic mode.

But by the end of this conversation, I'm hoping you feel a lot calmer about it and a lot clearer about it, because funnily enough, we actually don't think that it's gonna impact a lot of our listeners at all, and if anything, it actually might end up doing them a favor. So what we're gonna do is we're gonna strip back all the complicated jargon and just go through what's actually changed, what hasn't changed, and what, as the first time property investor, you should take out of this in terms of your overall wealth buil- building, ugh With your overall wealth-building strategy.

Pete, at a higher level, the key change is that new borrowing through an SMSF for residential property is being shut off. So for anyone who doesn't know, in a self-managed super fund, you're able to use your super to purchase residential property, and you borrow money via a mortgage the same way that you would with a bank at the moment.

And what's in the process of happening is that being shut off completely. When people are hearing about this change, what are you seeing in terms of people's reactions, but also what they're misunderstanding about it?

[00:01:32] Pete: Yeah, it's ... Everyone's reactions are really just the property professionals at the moment, to be honest, because this only impacts, what is it, 1%?

[00:01:39] Imti: Less than 1% of lending.

[00:01:41] Pete: It's such small scale, and you gotta wonder why it's even being done because it just impacts such a small part of total borrowers.

[00:01:46] Imti: Mm-hmm.

[00:01:48] Pete: It's mainly everybody who has an interest in SMSF borrowing, purchasing, whatever it may be, because their businesses are aligned with it.

So they're the ones that are making the biggest noise, but in reality it's such a small part of the world, it's just not something, our listeners in particular should be too concerned about because they probably shouldn't be doing it anyway.

[00:02:04] Imti: Yeah. There's two sides to it. There's the response from people inside of our own industry who are trying to capitalise on outrage and all of those sorts of things, because they make a lot of money through SMSF property transactions. The setup fees, by the time you pay a buyer's agent, an accountant, potentially a developer who skins you alive, everyone makes about 50 grand off the person in the transaction at a minimum.

[00:02:31] Pete: Yeah.

[00:02:31] Imti: Not including the person who sells them the house. The other side of that, though, which I can understand, is that people feel like an option is being taken away from them to build the financial future that they want, right?

[00:02:43] Pete: Yeah. Yeah, that's right. People have the idea of maybe they were gonna do it one day, and they feel like they have been robbed of that opportunity.

[00:02:49] Imti: Mm-hmm. And from that point, I can see why someone would be angry. Yeah. Because, we never wanna see opportunity taken away from people, and rightfully so. You and I are small business owners. Us going through these changes and looking at what they're doing in the small business space, we're also not happy.

[00:03:05] Pete: Mm.

[00:03:06] Imti: But in that sense, it's because when you operate within the rules of the game and what you've been told you can and can't do, to then have that flipped on people overnight is probably what's triggering a lot of that unfair and unjust sort of reaction, right?

[00:03:20] Pete: Oh, yeah, definitely. It's the way this whole thing's been delivered.

[00:03:23] Imti: Mm.

[00:03:23] Pete: But also, all the changes at the budget as well. It's just a circumstance of events, really.

[00:03:28] Imti: Mm-hmm.

[00:03:28] Pete: And it's a lot to take in. A lot of people's, not only businesses, but strategies have now had to pivot.

[00:03:33] Imti: Mm-hmm.

[00:03:34] Pete: And now they have to pivot again from a retirement point of view.

Yeah. So I get the frustration.

[00:03:38] Imti: Yeah. to recap, it is less than 1% of all lending, right?

[00:03:42] Pete: Yeah.

[00:03:42] Imti: It's not a huge amount, and we've actually been passionate advocates against people buying property through an SMSF.

[00:03:49] Pete: Yeah.

[00:03:49] Imti: And that 8 to 9 out of 10 people who do it shouldn't.

[00:03:53] Pete: Yeah, and that will never change. It's always been in my opinion, and your opinion too, that most people shouldn't be doing it. I reckon there's 1 in 10 who should really be doing it, to be honest.

[00:04:01] Imti: Yeah. We respect everyone's ability to have that choice and make that decision and follow that path. We just also think that it's not right for 9 out of 10 people. Yeah. Because a more balanced approach to building wealth will actually result in a better outcome because SMSF property requires you to outperform the market considerably because of the cost involved when you're a mum and dad investor.

[00:04:24] Pete: Yep.

[00:04:24] Imti: Because usually if you don't have over 250 grand in super, it's not even worth it. But even then, you're probably still pushing it at that number-

[00:04:32] Pete: Yeah, that's right

[00:04:32] Imti: ... because of the ongoing fees involved. The changes boil down to not being able to take out a loan to buy residential property through your super.

Now, what hasn't changed is commercial property. As it stands, still able to buy commercial property through an SMSF using lending which is the common approach at the moment. SMSFs themselves as an investment vehicle will still exist, and then if you wanted to buy residential property outright with cash, which I can't see any reason why you would want to, you can still do that.

Might be controversial, but I think a lot of mum-and-dad investors Will actually indirectly end up being better off in their retirement because this option's been removed.

[00:05:16] Pete: Yeah, I agree. Because it's comes down to the quality of assets that they're buying.

[00:05:21] Imti: Mm-hmm.

[00:05:22] Pete: But also you have to be active.

[00:05:23] Imti: Yeah

...

[00:05:23] Pete: I don't wanna get to the technicalities of it all, but if you've got a property in there that's not growing-

[00:05:27] Imti: Mm ...

[00:05:27] Pete: it's costing you money because your super repayments are actually holding the property. That's what-

[00:05:32] Imti: Yeah

[00:05:32] Pete: ... a lot of people don't realise is your super repayments are going towards holding the property.

[00:05:37] Imti: Mm-hmm.

[00:05:37] Pete: So you're contributing to something that's not growing.

[00:05:39] Imti: Yep.

[00:05:39] Pete: Like, you can't win from that.

[00:05:41] Imti: And you're paying interest on it, right?

[00:05:42] Pete: That's right,

[00:05:42] Imti: yeah. So you're paying interest back on the home loan.

[00:05:44] Pete: Yeah.

[00:05:45] Imti: The property might not be positively geared, it might have some repairs, and it might be negative growth or flat growth.

[00:05:52] Pete: Yeah. And we were working out before, the entry costs.

[00:05:54] Imti: Mm.

[00:05:54] Pete: You're about 60 grand, 70 grand, depending on the purchase price, stamp duty, accountant's fees, buyer's agent fees.

[00:05:59] Imti: Yeah.

[00:06:00] Pete: You're down that money. That comes out of your super fund.

[00:06:02] Imti: Yeah.

[00:06:02] Pete: That's money that you no longer have.

[00:06:04] Imti: Yeah. That's burnt cash.

[00:06:05] Pete: Yeah, it's gone.

[00:06:05] Imti: Yep. That won't grow over the time that you hold the property. Yep. So unless you can outperform that establishment cost, or you can be really, really active, or you can top up your fund really quickly, which for most mum-and-dad investors is impractical As much as it doesn't feel like a favour, and I use the term very loosely, it almost is one.

Again, fundamentally don't agree with the removal of people's ability to choose it as an option, but to me, this actually ends up hurting the property bros the most, who make tons of money in this space off the back of mom and dad investors.

[00:06:41] Pete: Yep.

[00:06:41] Imti: Nine times out of 10.

[00:06:42] Pete: Yeah, definitely. Used to be trust lending, and then it fell into SMSF.

[00:06:45] Imti: Mm-hmm.

[00:06:46] Pete: That's the natural progression.

[00:06:47] Imti: Well, that's what happened. As soon as the initial changes were announced about negative gearing and the capital gains tax, which we covered a few episodes ago, and there's a whole bunch of resources there, the pivot was almost overnight to new builds and buying property through SMSF.

[00:07:03] Pete: Yep.

[00:07:04] Imti: Our algorithms changed overnight from an advertising perspective from, " Oh, do trust lending-

[00:07:10] Pete: Mm

[00:07:10] Imti: ... and buy all these properties," to now buyer's agents being like, " Oh, we've got this great brand-new opportunity for you," which is in a green fields where you're gonna be negative from day one, or, " Oh, it's a great time to invest in property through your super."

[00:07:28] Pete: Hmm.

[00:07:28] Imti: Was it? Or is that just the easiest way for them to sell property now?

[00:07:31] Pete: Yeah. And it is an easy way, particularly in the outer estates where there's thousands and thousands of them being built.

[00:07:36] Imti: Mm.

[00:07:36] Pete: I don't wanna downgrade what people have done, but it's not that hard to set up the fund and then buy one of these properties.

[00:07:41] Imti: No, it's not. Cause everyone does it for you.

[00:07:43] Pete: And it's all high supply, too.

[00:07:44] Imti: Mm.

[00:07:44] Pete: They're there.

[00:07:45] Imti: And it's a psychological thing, right, where if you've got $50 in your wallet, cash, and you're handing that over to someone, you think about that twice.

[00:07:53] Pete: Yeah.

[00:07:53] Imti: Compared to opening- So- ... Apple Pay on your phone and just tapping away, right? You tap away like Apple's paying for it.

[00:07:58] Pete: Mm.

[00:07:58] Imti: But if it's a $50 note, you actually think about parting with it, and SMSF property's very similar psychologically, right, where nobody actively checks their super balance.

And so letting go of that money is actually psychologically easier, because they don't ever see it.

[00:08:14] Pete: Yeah.

[00:08:14] Imti: It disappears from their payslip, it goes into the abyss with their super fund, and it doesn't feel like real money.

[00:08:20] Pete: Mm.

[00:08:20] Imti: Then when you're paying, quote-unquote, all your professionals to help you through this process, you're not feeling the loss of that money.

[00:08:28] Pete: No.

[00:08:28] Imti: You're just operating on, " Oh, I'll be in this position in 10 years' time where my asset will double." Guess what? If you go on the MoneySmart website, there's a easy compound growth calculator, and if you put in your fund balance and your historical growth and your contributions, nine times out of 10, you're gonna end up in a better position not doing it.

[00:08:50] Pete: Yep.

[00:08:51] Imti: And the reason why I keep on looping back to emphasising that is that rightly or wrongly, whichever way you lean politically, we try not to really get under the weeds of any of that sort of stuff apart from the impact of changes. At a high level, yes, you can be cranky and upset about a choice being taken away from you, and that's perfectly fine and reasonable.

But I wouldn't be rushing to get an SMSF purchase done which a lot of people are doing at the moment. But also, if you're a mum and dad investor, I wouldn't be looking at it as an opportunity lost. Would that be fair, Pete?

[00:09:26] Pete: Yeah, I think it's an opportunity gained for most to be honest, yeah. The big mistake, yeah, I think you flagged it though, people are gonna rush out and do it. They are rushing out and doing it.

[00:09:33] Imti: Yeah.

[00:09:34] Pete: FOMO, that's what it is.

[00:09:34] Imti: And we're seeing it, right?

[00:09:35] Pete: Yeah.

[00:09:35] Imti: As soon as this change was announced, right? And don't get me wrong, I don't hate all buyer's agents. I co-host a podcast with one, and I have some very ethical people in my network, thankfully. But as soon as these changes were announced, everyone's offering to get people under contract or refund a retainer.

[00:09:52] Pete: Yeah. It's basically if we don't get you a property in 45 days, we work for free.

[00:09:55] Imti: Yeah.

[00:09:56] Pete: Or refund the retainer.

[00:09:57] Imti: Yeah.

[00:09:58] Pete: Which to me is crazy, 'cause some of these BAs have talked about, oh, needing months to do the due diligence-

[00:10:03] Imti: Yeah

[00:10:03] Pete: ... and make sure they get the right property.

[00:10:04] Imti: But-

[00:10:04] Pete: But now all of a sudden they'll get it done in 45 days.

[00:10:06] Imti: Yeah. They've, they've gone from, "Oh yeah, our client lead time is four to six months."

[00:10:11] Pete: Yeah.

[00:10:11] Imti: To overnight going, "Oh, no, no, we can get you a quality property for 45 days." Where's this quality property coming from?

[00:10:17] Pete: Yeah. Complete shift in their angles of marketing or promises and

[00:10:21] Imti: mm.

[00:10:21] Pete: It really just frustrates me. We've had this conversation for a while now, and it just yeah. no one in your network's advertising that out in the open, are they? None of the BAs you're working with.

[00:10:29] Imti: Not outwardly. There's a few that-

[00:10:31] Pete: Mm

[00:10:31] Imti: ... privately have mentioned it to me. Yeah. And they're people that I trust.

[00:10:35] Pete: That's right, yeah.

[00:10:35] Imti: But they're not using it as just a marketing gimmick to push it and push it and push it-

[00:10:40] Pete: Correct

[00:10:40] Imti: for the sake of it.

[00:10:41] Pete: That's right. Yeah, I think there's definitely an element like, you can do the right thing and try-

[00:10:44] Imti: Mm

[00:10:44] Pete: ... to get your clients in, but the ones that are pushing it and marketing it, it doesn't sit right.

[00:10:48] Imti: Yeah. The other consideration here is that there's no guarantee what these changes are gonna look like. You could stomach all these costs to try and set up an SMSF. You need a fund set up, you pay brokerage, you apply for the loan, and you're 10 grand in the hole. Mm. And then the wording of the changes are that, oh, you can't actually settle, or the fund needed to be created before X date, or whatever it is.

So unless you can with full confidence execute it, and you're doing it because you already had a well-thought-out thought process and you were going to do it anyway-

[00:11:22] Pete: Mm

[00:11:22] Imti: To me, that would be the only reason why you would then use this as a trigger to make that decision

[00:11:27] Pete: Yeah, if it was within your immediate plans.

[00:11:30] Imti: Mm.

[00:11:30] Pete: You're kinda ready, you got the means, financially stable. You get all the kinda ins and outs of SMSF, you know what the holding costs are.

[00:11:36] Imti: Yeah.

[00:11:36] Pete: Then sure, it makes sense.

[00:11:38] Imti: Mm.

[00:11:38] Pete: Yeah.

[00:11:38] Imti: But I think there's this You said it before, FOMO, right?

[00:11:41] Pete: Yeah

[00:11:42] Imti: Where the industry's very much driving people close on these properties ASAP.

[00:11:46] Pete: Well, I don't think most people would've even thought about it-

[00:11:49] Imti: Yeah ...

[00:11:49] Pete: until the buyer's agent started saying 45 days.

[00:11:52] Imti: Mm.

[00:11:53] Pete: It never actually crossed my mind.

[00:11:54] Imti: Yeah.

[00:11:54] Pete: To be honest, 45 days until these changes come into effect, but it never crossed my mind to start advertising that-

[00:12:00] Imti: Mm

[00:12:00] Pete: and to put that kind of pressure on people.

[00:12:02] Imti: Yeah.

[00:12:02] Pete: It actually made me just think about it a few times when I saw it. I'm like, "Shit, that is the case," but, I never thought about that.

[00:12:07] Imti: Mm. And that's the thing, right? People are getting bombarded with that messaging.

It's like a closing down sale. Get in now or you'll never get in at all.

[00:12:15] Pete: Yeah. Because really, if you were in the process of buying, you would be like, "Ah, shit, I've got 45 days."

[00:12:20] Imti: Yeah.

[00:12:20] Pete: But if you weren't, or you hadn't even got the fund set up- Yeah ... I don't think it would cross your mind.

[00:12:24] Imti: Yep. And you would reach out to the person who's running these ads, the buyer's agent, the property advocate-

[00:12:31] Pete: Mm

[00:12:32] Imti: ... the accountant, the planner, whoever's running these ads, and they're not gonna tell you it's a bad idea.

[00:12:38] Pete: No, I mean- ... imagine getting an influx of 50 people after advertising the 45 days.

[00:12:43] Imti: Mm.

[00:12:44] Pete: How are you gonna service all of them- Yeah ... and get them into quality properties when also some of these buyer's agents are saying, "We only work with a handful of people at a time"?

[00:12:51] Imti: Mm-hmm.

[00:12:51] Pete: And they're the ones that are advertising this service. Yeah. So there's a lot of questions to be answered, and you don't wanna be rushing into a deal.

[00:12:57] Imti: 100%. I think for someone- trying to understand what to take out of all of this really is it's gonna show you who in the industry you should probably put your trust into and who you might wanna question.

[00:13:09] Pete: Yeah.

[00:13:10] Imti: In terms of acting in your best interest. Because if you are engaging a team and, we've broken it down many, many times, They should be equipping you with the knowledge and the advice to make an informed decision, not just putting decisions in front of you and telling you that it's a good thing, and you've got no additional context behind that.

[00:13:29] Pete: Yeah, yeah, think about how you're receiving the information. Yeah. You're getting it through email marketing, you're getting it on Instagram or Reels and all that. If that's how the information's coming to you from these professionals, I'd be thinking twice.

[00:13:41] Imti: Mm. ' Cause how's it relevant to your personal situation?

It's not.

[00:13:44] Pete: It's not, no. They're just trying to put it out as to many people as possible in the hopes that people are gonna ... and they will. I can't imagine-

[00:13:51] Imti: Yeah ...

[00:13:51] Pete: the number of people that responded to that and they're now trying to source deals for.

[00:13:55] Imti: Mm.

[00:13:56] Pete: Brokers too, though. Brokers aren't innocent in this either.

[00:13:58] Imti: Oh, yeah.

[00:13:58] Pete: It's all professionals.

[00:13:59] Imti: God no. Yeah, yeah, yeah.

[00:14:00] Pete: Don't want to just sit here and say buyer's agents. It's everyone. Developers bloody real estate agents. I'm getting so many emails and text messages, and even phone calls from real estate agents, and their opening line is, " Perfect for SMSF."

[00:14:10] Imti: Yeah, and it's a-

[00:14:10] Pete: "We'll do a deal within 45 days."

[00:14:12] Imti: Yeah, and it's a piece of garbage one-bed apartment.

[00:14:14] Pete: Correct. Yeah, yeah. So it's everyone in the industry is just jumping on this-

[00:14:17] Imti: Yeah

[00:14:17] Pete: ... as a quick win.

[00:14:18] Imti: Especially at the price points, right? Because in an SMSF, a lot of the properties that tend to sell to mom and dad investors are, under 400 grand.

[00:14:26] Pete: Yeah.

[00:14:26] Imti: And they're-

[00:14:27] Pete: Yeah, one-bedroom apartments ...

[00:14:28] Imti: the one-bedders in CBDs in a massive tower that has 150 cut and paste-

[00:14:32] Pete: Yep ...

[00:14:33] Imti: versions of the apartment.

[00:14:34] Pete: Or if you've got a bit more, it's the outer fringe house and land packages.

[00:14:37] Imti: Mm-hmm. And where we're really trying to go with this is that, yes, the change seems big. It's really not that big, and at a financial level, it's probably not negatively impacting the listener at all.

[00:14:51] Pete: Yeah. It's definitely been blown out of proportion-

[00:14:54] Imti: Mm

[00:14:54] Pete: ... or catastrophised. Yeah.

[00:14:55] Imti: Because you're more likely to get a much better outcome. I'm not even a financial planner, neither is Pete.

You're better off paying a financial planner five grand than you are ponying up 60 in costs.

[00:15:07] Pete: They're skipping that part, right? Yeah, yeah. Everyone who's trying to rush in now is skipping one of the most important parts of setting up an SMSF-

[00:15:13] Imti: Mm ...

[00:15:13] Pete: which is talking to a financial planner.

[00:15:15] Imti: Yeah, about alternatives.

[00:15:16] Pete: Yeah.

[00:15:16] Imti: And, it's a episode for another day, but it's the irony of people looking at spending 60, 70 grand in setup costs for something, but not willing to spend five on a planner.

[00:15:27] Pete: Yeah, it's crazy.

[00:15:28] Imti: Because- It's not as sexy as the ego buying that we've covered, right?

The $1 million in Vanguard-

[00:15:34] Pete: Yeah

[00:15:34] Imti: ... doesn't impress anyone?

[00:15:34] Pete: Yeah, it's the same thing.

[00:15:35] Imti: Yeah,

[00:15:35] Pete: yeah. I got, you know,, couple hundred thousand dollars in shares.

[00:15:37] Imti: Yeah.

[00:15:38] Pete: Compared to, oh yeah, I own property in-

[00:15:39] Imti: Yeah, I have property in super.

[00:15:41] Pete: Yeah, yeah. But- I own my own SMSF,

[00:15:42] Imti: But no one knows the net asset position of that property is, like 75 grand positive.

[00:15:48] Pete: yeah, that's right. And it's costing you money every single week, and it's not growing.

[00:15:52] Imti: Hmm. And if you're listening to this, I know we've taken a bit of a light-hearted approach to the changes, and haven't really pulled them apart aggressively.

But it's because for most people it is getting blown out of the water. It's designed to make you angry, rage bait algorithm stuff. And when it comes down to your actual long-term financial future, again, 1% of lending and nine out of 10 mum and dad investors are better off never doing it. To illustrate the point, Pete, you're in the space and you're borderline on doing it for yourself.

[00:16:22] Pete: Yeah, I'm questioning it myself, but, again, got the means to do it.

[00:16:27] Imti: Yeah.

[00:16:27] Pete: Got the asset base to do it. If I didn't have the asset base, there is no way I would be even considering it.

[00:16:32] Imti: Mm-hmm. '

[00:16:33] Pete: Cause I can pull different levers to help me through it.

[00:16:35] Imti: Yeah. If something goes wrong, you can move things around-

[00:16:38] Pete: Correct

[00:16:38] Imti: to make sure things are okay.

[00:16:39] Pete: Yeah, yeah. But if I was a PAYG, I had maybe no investment properties, or maybe one or two, I wouldn't touch SMSF. '

[00:16:45] Imti: Cause if you lost your job, who's making those loan repayments?

[00:16:47] Pete: Exactly, yeah. People don't realise. Or if you wanna take a break-

[00:16:50] Imti: Mm ...

[00:16:50] Pete: and do travel and create a business or whatever, you still need to find a way to contribute to your super.

[00:16:55] Imti: Pay down that debt, yep.

[00:16:56] Pete: Yeah. It's actually ... People don't realise it does tie you down.

[00:16:59] Imti: Mm.

[00:16:59] Pete: Very much s- similar to what it would with just an investment property in your own name.

[00:17:02] Imti: Yeah. Before we wrap up, there's two things that I do wanna touch on quickly. One being that potentially a lot of lenders will exit the space.

So the last time a change like this happened, a whole bunch of lenders stopped lending for SMSF. What that meant was a whole bunch of people got stuck on interest rates at, like, 14, 15%. So if you do have a property in SMSF, and hopefully this episode hasn't put you off the fact that you've got property in SMSF, 'cause I'm hoping you did it in the right way I'd be looking at your loan structure and looking to refinance potentially to a product that has an offset or a redraw.

There's probably three lenders in the market who do it. Most don't. Legalities of that is a problem for those banks, not for the client. So I'd be looking at your existing loan structure if you do have an SMSF, because lenders will pull out of the space. And for anyone who's under contract, potentially for an off-the-plan purchase, who needs to settle in the next 12 to 18 months, I would strongly recommend just getting advice around that contract and your rights under it, because there is a possibility that multiple lenders do pull out and you're stuck trying to close on a property that you've already put a deposit on.

Or they just sunset clause you, take your money, and put the property back on the market And you're 50, 60 grand in the hole. So I'd just definitely be getting advice around that if you're in that situation, because I think for me, that's the part of the changes that makes me angry.

[00:18:29] Pete: Yeah.

[00:18:29] Imti: Is that it puts those people at risk who have already committed to a decision, and the people making the laws will be like, "Well, we're not making laws that impact them," but they can't control the commercial decisions of the lenders.

For example, AMP has already pulled out of the SMSF space, and these changes haven't been formalised yet, and I would just expect to see more of that. Pete, anything before we wrap up?

[00:18:50] Pete: Oh, yeah, I think we've covered it. It's just, yeah, don't get stuck in the FOMO.

[00:18:53] Imti: Mm-hmm.

[00:18:54] Pete: Don't be talking to professionals who aren't acting in your best interests, and yeah, definitely just don't purchase something you're gonna regret.

[00:18:59] Imti: Awesome. I think that's a great place to end us up on. If you've been listening to this point, thank you. If you do need help with being pointed in the right direction because you are in a bit of a sticky situation in regards to your personal SMSF stuff, can reach out to us by jumping on the website, firstti mepropertyinvestor.com.au. Our contact details are there, and if we can't help, we'll definitely point you in the right direction. But Pete, till next week.