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Dr. Mark Sinclair
Dr. Mark Sinclair, Mentor Education

Massive Rise In SMSF Use Of Non-Prime Mortgages.

13 October 2013

 The number of non-prime mortgages used to finance properties for SMSFs has increased threefold in the last 12 months.

With low interests rates, increased demand for property and a return of consumer confidence there are significant warning signs that non-prime mortgages will become a significant force in the property market, says Digital Financial Analytics principal Martin North.

It has been reported that at least one of the big four banks is testing the market by helping finance non-prime lenders and Liberty Finance (a specialist lender non-prime borrowers), recently issued a $250 million commercial mortgage-backed security to fund property purchases for SMSF super.

North has said that, “If the market continues to grow, the major banks will be attracted into this part of the market because of rising volumes and higher returns.”

Low documentation or no documentation loans are typically being made to young people without enough savings for a traditional deposit leveraging their superannuation contributions to buy an investment property or retirees, with larger savings attempting to generate higher returns buying and leasing an investment property. In many cases, they are sought because the borrower might not have the required savings history with the bank, or the required deposit.

The RBA has indicated that the number of non-prime loans in Australia has dropped about 8 per cent and Digital Financial Analytics principal Martin North has said that his analysis reveals the volume has increased threefold in the past 12 months due to  “low interest rates, pent-up demand for property and rising expectations have fuelled activity.”

The potential higher risk results in higher fees and rates, meaning higher margins and profits for the lender. For example, a $250,000 25-year home loan with a loan-to-value ratio of about 80 per cent, Liberty Financial charges about 7.5 per cent, compared with a variable rate of about 5.9 per cent from NAB and 6.3 per cent from Westpac. Financial Consultancy group Tria Investment Partners, managing partner Andrew Baker has said that, “if a small lender like Liberty is already securitising SMSF loans, there is a fair bit of movement at the SMSF gearing ranch.”

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