High-LVR strategies can strain cash flow in super funds, lending specialist warns
Higher interest rates have increased scrutiny on how self-managed super funds (SMSFs) are set up to carry property debt over time, according to Richard Chesworth (pictured top), SMSF lending specialist at Bluestone Home Loans.
For Chesworth, the test of an SMSF loan was not the maximum amount approved at settlement, but whether the arrangement remained workable if rates, rental income or costs shifted.
“Some lenders are pushing SMSF loans at 90% LVR, often framed around avoiding lenders mortgage insurance or entering the market sooner,” he said. “That strategy may suit individuals for their home finance or purchasing an investment property, however in the concessionally taxed environment of superannuation at 15%, high gearing may deliver a poor outcome to the SMSF.
“At such a high gearing level, rent and contributions may often be fully absorbed through interest and holding costs of the property. Until the asset experiences significant income growth, the income streams are directed to meeting the borrowing obligations, rather than building retirement savings.”
Chesworth added that SMSFs typically faced tighter limits than personal investment borrowers, with fixed contribution caps, less capacity to hold large cash buffers, and reduced flexibility if circumstances changed.
“At very high LVRs, even small shifts in interest rates, vacancies or expenses can put pressure on the fund and meeting the SMSF’s objectives,” he explained.
“Lower LVRs, on the other hand, are more likely to deliver stronger rental coverage, reduced sensitivity to rate movements, greater resilience during vacancies, and a clearer path toward neutral or positive cash flow.
“Furthermore, once positively geared, the SMSF trustee has greater flexibility to support the diversification needs of the SMSF.”
Chesworth said brokers working with SMSF trustees had a key role in ensuring the borrowing structure matched the fund’s objectives and constraints, particularly in a higher-rate environment.
“Pricing still plays a role, but in the current environment, brokers are using pricing strategically,” he stated. “Rather than chasing the lowest headline number, brokers are looking to lending partners who provide value in delivering on their customers’ SMSF needs. Equally many are looking for pricing that genuinely supports serviceability and cash flow, without forcing clients into higher leverage just to make the deal work.”
The lending specialist said this view informed Bluestone’s current 0.25% SMSF campaign, which the lender said was intended to improve serviceability, reduce repayment pressure as rates rise, and support more moderate LVR settings.
“Our approach to SMSF lending is not about pushing maximum leverage or chasing short term trends,” Chesworth stressed. “In this market, pricing has to work hand in hand with structure and we are seeing brokers using pricing to strengthen serviceability, not to justify unnecessary gearing.
“We believe that mortgage brokers who work with SMSF trustees are ideally placed to help them make borrowing decisions they can live with.”
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