Some investors who are deciding to self-manage their super by investing in property are coming unstuck despite boom property conditions and record low interest rates.
The biggest pitfalls are swallowing those who might have bought off-the-plan and ended up paying over market price.
Some financial experts are concerned we might be seeing the first wave of investors who have taken poor advice and have paid too much for their property in a high risk self-managed super fund (SMSF) and fall behind in their payments.
Financial Rescue is a company that tries to help people get out of bad investments and steer clear of poor financial advice, and their managing director Neil Kendall told The Age that borrowing in your super fund to buy property is a very high-risk move and people have been sold properties on promises of big returns, major tax savings and capital gains.
“Instead they have suffered massive negative equity – which happens when the value of a property falls below its purchase price,” he said.
“That combined with the high cost of setting up the fund has consumed their super savings.”
Investment counsellors have said some SMSF investors have borrowed heavily to buy property and lost up to 75 per cent of their investments in two years.
Most of them had super funds between $100,000 and $150,000 and were advised to borrow up to $500,000.
Kendall told The Age they have replaced their retirement nest eggs with huge debts that could take the rest of their lives to pay off.
“All those special offers that come with the properties are not free,” he said.
“Developers are not charities, they operate on big margins. They need to cover the cost of things like rental guarantees from somewhere – and that somewhere is in the profit margins in the price.”
The Australian Securities and Investments Commission (ASIC) recently held a survey and found that borrowing in superannuation is often from bad financial advice. The survey of 100 investors found most of the ‘bad advice’ was in relation to borrowing from super to buy property.
In the survey 28 per cent of advice was considered ‘poor’ and just 1 per cent was considered ‘good’. The rest was ‘professionally poor’ or ‘unacceptable’.
A recent Financial System Inquiry (FSI) found each month over 3000 property buyers are borrowing from their super funds to buy purchase business or residential property. The FSI report review was from some leading financial experts and stressed the dangers of leveraging from super savings.
“Leverage (or borrowing) should not be a core focus of SMSFs – or any superannuation fund – and is inconsistent with Australia’s retirement income policy,” the report said.