The Dangers Of Limited Recourse Borrowing Arrangements In Super: What SMSF Owners Need To Know

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Borrowing money to invest in your super can be risky, especially if you need to be better-versed in the complexities of leveraged investing.

LRBAs—limited recourse borrowing arrangements, are SMSF loans taken out at a higher interest rate than generally offered in the market.

The 2022 Report to Government on Leverage and Risk in the Superannuation System found a risk of one-stop property shops providing inappropriate advice.

The research discovered that the percentage of SMSFs using LRBAs had increased from 2.9% to 11.8% between 2013 and 2020, with LRBA assets comprising 71% of all assets in SMSFs containing an LRBA.

The value of assets held under LRBAs grew from $8.8 billion in June 2013 to $59.7 billion by June 2021, representing 7.2% of total SMSF assets at that time (compared to 1.9% in June 2013).

The original report came out in 2019 and said that LRBAs could be detrimental to people’s retirement funds. It recommended that the government look into policy changes, which was echoed by the Financial System Inquiry’s suggestion to eliminate LRBAs.

However, the report noted LRBAs are unlikely to have a broad financial impact.

“Poorly-diversified SMSFs that were heavily leveraged in property via LRBAs are at risk of increasing interest rate rises,” said the report.

“But it is unlikely that losses in these SMSFs would have a broad financial impact due to their small size, and the resulting limited impact on APRA-regulated super funds (which are by far the most important systemic risk.”

LRBA is most prevalent in SMSFs where the net fund size falls between $200,000 and $500,000.

The average borrowing of SMSFs with LRBAs in 2020 was $350,492, and the average value of LRBA assets was $778,600.

In 2020, SMSFs with LRBAs assets were still primarily concentrated in a single investment strategy, with 43 per cent holding over 90 per cent of their total asset value under LRBAs (compared to 41 per cent in 2017).

“SMSFs that are less diversified and have LRBAs are at greater risk of asset concentration. This could lead to a decrease in the value of the SMSF if there is a price drop, which would be amplified by borrowing,” the report said.

“This high degree of asset concentration could lead to greater risks for SMSF members if personal guarantees are involved, leading to a loss of personal wealth beyond superannuation.”

At the end of the 2021 financial year, the total borrowing amount for SMSFs was $27.8 billion.

The SMSF leverage ratio (total LRBA borrowings divided by total LRBA assets) has decreased from 34.6% in 2017 to 32% in 2020 as asset prices have increased.

Citing data from the APRA, the study found that less than one per cent of overall residential mortgage lending by authorised deposit-taking institutions comprised SMSFs as of March 2022.

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