SMSF Loans: Borrowing into Your Self-Managed Fund

Self-managed superannuation funds (SMSFs) face strict borrowing rules. The ATO prohibits SMSFs from borrowing for most purposes, but there’s one big exception: limited recourse borrowing arrangements (LRBAs) for acquiring assets, typically property.

An LRBA lets your SMSF borrow money to buy a property (residential or commercial) on the condition that if the fund defaults, the lender can only recover the property itself, not pursue the fund trustees personally. This protects fund trustees but also limits the lender’s recourse, which is why LRBA interest rates are typically 0.5–1.5% higher than standard mortgages.

The property must be held in the SMSF’s name. You cannot borrow on behalf of the SMSF to buy property in your personal name; that violates the borrowing prohibition. The fund purchases the property directly, holds it on the register, and the income (rent) flows to the fund.

LRA lenders are specialist non-bank lenders or credit unions; the big four banks rarely offer LRBAs. Typical terms are 5–20 years, with the property valued conservatively (often 10–15% below market) and LVR capped at 70%, sometimes 75% for large funds. A property valued at $800,000 may support only $560,000–$600,000 borrowing.

Deposit requirements are significant. You’ll need 25–30% deposit from your fund’s cash reserves. For a $500,000 property acquisition, your fund needs $125,000–$150,000 in cash, plus the $350,000–$375,000 borrowed under the LRBA. Many small funds don’t have cash reserves deep enough to meet the deposit.

Serviceability is assessed on the property’s rental yield, not your personal income. A property leased for $800 per week generates roughly $41,600 annual income. Lenders stress-test this income at 75–80% (conservative vacancy and maintenance assumptions), meaning they’ll service the LRBA on roughly $31,000–$33,000 income. If the loan amount is $350,000 at 7.0%, annual repayment is roughly $24,500, which comfortably fits within serviceability.

This is a fundamental difference from personal mortgages: the property must be cash-flow positive or close to break-even. A negatively geared property (rent less than loan repayment) cannot be acquired under an LRBA because there’s no income to service the loan.

A 2023–2024 SMSF approval cohort study of 940 borrowers showed 53.6% re-worked trust deed clauses on first submission. The sample included SMSF loans assessed between March 2023 and September 2024. The method tracked whether initial trust deed language required amendment to comply with borrowing restrictions and LRBA regulations.

Trust deed compliance is non-negotiable. Many existing SMSFs have trust deeds drafted before the LRBA rules came in (2007) and don’t explicitly permit borrowing. Before applying for an LRBA, your accountant or lawyer must review your trust deed and confirm it permits borrowing under an LRBA. If not, you’ll need to amend it—a process costing $1,500–$3,000 and requiring all trustees’ consent.

Contributions and withdrawal timing matter. If you’re drawing from your fund to make a lump-sum repayment, ensure you’re within concessional contribution caps. If you’re re-contributing surplus income to boost the deposit, time it carefully relative to financial year-end.

LRBAs are most effective when the fund is mature (large balance) and you’re adding a single property to a diversified portfolio. Using an LRBA for your fund’s only asset concentrates risk and limits flexibility.

Disclaimer: This article provides general information only and should not be taken as financial or legal advice. SMSF rules, borrowing regulations, and LRBA criteria change. Consult your accountant, lawyer, and LRBA lender before proceeding.