16 Jan LVR’s are on the move – Andrew Mirams
Bare Trusts are quite common but they still need to be set up correctly. Andrew Mirams fills in the gaps and talks about how the banks look at them. He also outlines the changes in loan to value ratios.
Kevin: What’s changed? How has the lending environment changed? Particularly, let’s have a look at self-managed superannuation funds, loan-to-value ratios, what’s happening, and how the banks are feeling about that. To bring us up to date on that, Andrew Mirams from Intuitive Finance.
Good day, Andrew. Welcome back into the show. Happy New Year to you, too, mate!
Andrew: Good day, Kevin. Happy New Year to you. Thank you very much. Happy New Year to all the listeners out there.
Kevin: I did have a question on this point. Firstly, the question relates to a bare trust. Can you tell me what a bare trust is?
Andrew: There have been a lot of uses for them, but now they basically work in conjunction with a self-managed super fund. A self-managed super fund is what we call a limited resource borrowing arrangement. What that means is that if a property is purchased in your super fund, it needs to have an independent owner, and that’s what the bare trust is.
If you bought a property for $200,000 and had a loan for $160,000, let’s say, and for some reason, you had to sell the property for $100,000 – the property had crashed – and there was a deficit, the banks can’t go after the balance of the superannuation fund because that’s the limited resource borrowing. It’s just solely against that property and against that. So, the bare trust actually insulates or isolates the balance of the superannuation fund from the property and the actual borrowing.
Kevin: Given that it’s protecting the value of that property, is it possible to have more than one property in a bare trust?
Andrew: No. You can have numerous properties in a self-managed super fund, but one bare trust owns each property because each one is individually isolated from the other transactions.
Kevin: Yes, that answers my next question. You can have multiple properties in a self-managed super fund but each one has to have its own trust.
Andrew: Its own bare trust, because it’s the bare trust that actually secures that limited resource borrowing arrangement.
Kevin: Okay. How difficult is a bare trust to set up?
Andrew: It’s pretty simple. It becomes part of it when you set up your self-managed super fund. Your financial planners, accountants, solicitors can set them up with minimum of fuss. It’s quite easy to do.
Kevin: How do the banks look at the lending in a bare trust like that?
Andrew: It’s still they’re lending to the super fund; the bare trust is just the beneficial owner of it. The bare trust is a trustee for the super fund. So, that bare trust still owns the property on behalf of the superfund.
Kevin: What’s happening with loan-to-value ratios? How much money do you need to set one of these up?
Andrew: With self-managed super funds, we’ve seen over the course of the last year the LVRs reduce. The majority… I think everyone now is 70% loan-to-value ratio, down from 80% in times past. There’s also another little factor with that. The super funds must now also be able to prove a 10% liquidity over and above that. So, you’re almost now talking about a 60% loan-to-value ratio.
As with all the investor rates and things like that, there’s now a premium if you want interest-only, so generally your principal-and-interest rates will be cheaper. They don’t really define on the loan-to-value ratios, but 70% is about the rule of thumb nowadays, Kevin.
Kevin: Is that worsening over time? Is there a requirement for you to put more money into these bare trusts?
Andrew: I think probably we’ve had some buoyant markets. I think we’ve seen the banks and the regulators want to just restrict and make sure you don’t over because of the limited resource, so they can only actually ever go back after that; probably they can’t pursue the balance of the fund or the directors.
So, I think what we’ve seen is in the heady times, we were doing 80% loan-to-value ratios. It’s now restricted just to protect probably the lenders and also the funds to make sure they’re not over-committing themselves to get into the market.
Kevin: That 70% LVR, is that the lowest it’s been, or have there been lower?
Andrew: There are a couple lenders that are at 60%, but most lenders will still do 70% now. That’s come off. The 80% was the maximum we were able to do, so that’s come down from there. That’s about where it sits at the minute now – 60% to 70% – plus normally that 10% liquidity requirement as well.
Kevin: As always, we’ll just round this chat out, to make sure you get some independent legal advice and also independent financial advice for your own situation, you could do certainly no better than going to Andrew Mirams and the team at Intuitive Finance. You can contact them on any one of the buttons on Real Estate Talk.
Thanks for your time, Andrew. We’ll talk to you again soon.
Andrew: Pleasure, Kevin. All the best.