Understanding the basics of SMSF property loans

Self-Managed Super Funds can borrow to purchase investment property through a Limited Recourse Borrowing Arrangement.

The LRBA structure isolates the loan to a single asset held in a bare trust, meaning the lender's recourse is limited to that property if the loan defaults. Your other fund assets remain protected. The fund makes repayments from member contributions, rollovers, and rental income, and the property must satisfy the sole purpose test by existing only to generate retirement benefits for members. Personal use is prohibited.

How Limited Recourse Borrowing Arrangements are structured

An LRBA requires three entities: your SMSF as trustee, a bare trust to hold the property, and the lender. The SMSF borrows funds and directs the bare trustee to purchase the property. Legal title sits with the bare trust until the loan is repaid, at which point the property transfers to the SMSF. Each property requires a separate LRBA, so funding two properties means establishing two distinct borrowing arrangements with separate bare trusts. The structure exists to comply with superannuation law while allowing geared investment within a controlled framework.

What LVR limits now apply for residential and commercial property

LVRs up to 80% are now available from non-bank and specialist lenders for both residential and commercial property. This is a notable shift from the 60-70% range that dominated the market until recently. The higher ceiling means a fund purchasing a residential property can secure finance with a 20% deposit rather than 30-40%, reducing the capital required upfront. The same applies to commercial assets, which historically attracted even more conservative lending terms. Not all lenders offer 80%, and the rate you receive will depend on the fund's financial position, the property type, and the lender's appetite.

SMSF loan interest rates and how they compare

Rates for SMSF property loans sit above standard residential investment loans due to the additional risk profile and smaller loan volumes. Variable rates are more common, though some lenders offer fixed terms. The spread between lenders can be significant, so comparing terms across multiple providers is necessary. A SMSF mortgage broker can access lender panels not available to the public and structure the application to meet each lender's criteria. Rate alone does not determine suitability; loan features, serviceability treatment, and prepayment flexibility also affect long-term outcomes.

Sole purpose test and what it means for property use

The property must exist purely to provide retirement benefits. You cannot holiday in it, allow family members to occupy it below market rent, or lease it to a related party unless specific exemptions apply. A fund member purchasing a residential property in Adelaide's inner suburbs and renting it to their adult child at 20% below comparable market rent would breach the sole purpose test. The property generates income, but not on commercial terms, which exposes the fund to compliance action. If leasing to a related party, the arrangement must satisfy the in-house asset rules, which cap such holdings at 5% of total fund assets. Rental income within the SMSF is taxed at 15% during accumulation phase, and capital gains on properties held for more than 12 months receive a one-third discount.

Restrictions on property improvements under an LRBA

You can fund repairs and general maintenance from the SMSF while the loan is active, but structural changes that alter the character of the asset are not permitted until the loan is discharged. Repainting, replacing fixtures, or repairing a roof are allowed. Adding a second storey, subdividing, or constructing a granny flat are not. This restriction exists because the LRBA must relate to a single acquirable asset at the time of purchase. Changing its fundamental nature creates a different asset, which falls outside the original borrowing arrangement. If structural work is planned, the loan must be repaid first or the improvement deferred.

SMSF deposit requirements and borrowing capacity

Borrowing capacity depends on the fund's existing balance, projected contributions, and the rental income the property will generate. Lenders assess serviceability using a combination of these cash flows, typically applying a buffer to rental income and assuming contributions continue at current levels. The fund must hold sufficient cash to cover the deposit, acquisition costs including stamp duty and legal fees, and maintain a reserve for ongoing expenses. Stamp duty in South Australia varies by property price and use, and conveyancing, trustee fees, and lender establishment costs add to the upfront requirement. A fund with a balance of $200,000 looking to purchase at 80% LVR still needs to fund the 20% deposit plus all transaction costs from within that balance, which can constrain purchase price.

Related-party LRBAs and the safe harbour interest rate

If the SMSF borrows from a related party such as a fund member or a family trust, the loan must be on arm's length terms. For the 2025-26 financial year, the safe harbour interest rate is 8.95%, down from 9.35% the previous year. Charging below this rate without commercial justification may trigger compliance scrutiny. The loan must be documented with a formal agreement, regular repayments, and interest charged at a rate consistent with what an unrelated lender would require. The safe harbour rate provides a benchmark, but the actual rate should reflect the risk, security, and loan structure. Loans from related parties still require a bare trust and must comply with all LRBA rules.

Trustee training requirements and compliance obligations

All SMSF trustees, both new and existing, must now complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance can result in penalties up to $19,800 per trustee, or fund disqualification in severe cases. The training requirement reflects increased regulatory focus on funds using debt, particularly as LRBA assets approached $75 billion. Trustees are responsible for maintaining records of all transactions, loan agreements, bare trust deeds, rental income, and expenses. Data-matching and transaction monitoring have intensified, and the ATO expects rigorous documentation. If you operate the fund through a corporate trustee, each director must complete the training.

When an SMSF commercial loan makes sense

A commercial SMSF loan suits funds acquiring office space, retail premises, warehouses, or industrial assets. The same 80% LVR ceiling now applies, and the fund can lease the property to an unrelated tenant or, in some cases, to a related business if the in-house asset rules are satisfied. Consider a fund purchasing a small industrial unit in Adelaide's northern suburbs and leasing it to the member's business. The lease must be at market rent, documented with a formal agreement, and the asset value must not exceed 5% of total fund assets. The rental income provides a stable cash flow to service the loan, and the fund benefits from both income and capital growth within the concessional tax environment.

Refinancing an SMSF loan to improve terms

Refinancing can reduce the rate, access equity, or shift to a lender with more suitable loan features. The process requires a new application, valuation, and settlement, but the same LRBA structure remains in place. The property stays in the existing bare trust, and the new lender takes security over that trust. Timing matters, particularly if rates have moved or the fund's balance has grown enough to improve serviceability. A fund that borrowed at 7.5% three years ago may now access a lower rate or better LVR treatment, depending on the property's current value and the fund's financial position. For guidance on whether refinancing your SMSF loan is viable, compare current offers against your existing terms and factor in exit fees, valuation costs, and new establishment charges.

Call one of our team or book an appointment at a time that works for you to discuss your fund's position, the property you are considering, and how the loan structure would apply in your situation.

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