Is SMSF Lending Right for You? A Guide to Limited Recourse Borrowing Arrangements (LRBAs)
- Jaeneen Cunningham
- Jul 2
- 6 min read
In today’s property-savvy climate, Australians are looking beyond traditional investment strategies to grow their retirement savings. One increasingly popular option is using a Self-Managed Superannuation Fund (SMSF) to invest in property through Limited Recourse Borrowing Arrangements (LRBAs). But is SMSF lending the right fit for you? Let’s dive into the lending basics, how loan servicing is assessed, the potential benefits, and why the right professional advice is crucial.
Understanding SMSFs and LRBAs
An SMSF is a private superannuation fund managed by its members, typically set up with up to four trustees who control investment decisions, including property purchases. Unlike public or industry super funds, an SMSF allows greater flexibility over investment choices—particularly when it comes to direct property investment.
However, superannuation law places strict conditions on borrowing within an SMSF. That’s where an LRBA comes in.
What is an LRBA?
A Limited Recourse Borrowing Arrangement is a borrowing structure that allows an SMSF to purchase a property with borrowed funds while ensuring the lender’s recourse (claim on assets) is limited only to the property purchased—not the SMSF’s other assets. This legal structure protects the SMSF’s remaining investments if the property loan defaults.
To comply with superannuation legislation (SIS Act), the following must apply:
The borrowed money is used to acquire a single acquirable asset (or a collection of identical assets).
The asset is held in a bare trust until the loan is repaid.
The SMSF must have the right to acquire legal ownership of the property once the loan is repaid.
The income generated (e.g. rent) must go to the SMSF.
This arrangement has opened the door for SMSFs to leverage their super to grow wealth through property, a traditionally stable and appreciating asset class.
Servicing an LRBA Loan: What Lenders Look For
SMSF loans are assessed differently from regular home loans. Since the fund—not an individual—takes on the debt, servicing the loan (i.e., demonstrating the ability to repay it) depends on the fund’s income and assets, not your personal salary.
1. Superannuation Guarantee Contributions (SGC)
Regular employer contributions, known as SGCs (currently 11% of an employee’s salary as of July 2025), form the backbone of loan servicing.
Lenders consider:
The consistency of contributions.
The age of the members (younger members have a longer contribution horizon).
Employment stability of members.
These payments demonstrate an ongoing inflow of funds, critical for covering repayments.
2. Rental Income
For SMSFs investing in residential or commercial property, rental income plays a vital role in servicing the loan.
Lenders assess:
Lease agreements and rental history.
Whether the lease is arms-length (required by law).
The type of tenant—commercial leases with established businesses may be viewed more favorably due to potentially higher and longer-term rental yields.
In cases where the property is leased to a related party (only allowed with commercial properties), strict arms-length conditions must still apply.
3. Investment Earnings Within the SMSF
SMSFs often hold shares, managed funds, and term deposits. These assets generate income through dividends or interest, which can also support the servicing of an LRBA.
Lenders will evaluate:
Net income from existing investments.
The stability and diversity of the portfolio.
Projected growth or changes in asset performance.
In most cases, all income sources must be proven over a reliable timeframe (e.g., tax returns and financial statements for the fund).
The Benefits of Property Investment Through an SMSF
Investing in property through your SMSF isn’t just about diversifying your retirement portfolio—it can offer some strategic tax, growth, and wealth-building benefits.
1. Capital Growth Through Leverage
The key appeal of LRBAs is the ability to leverage your super fund’s balance to acquire a larger asset than you could with cash alone. For example, with $200,000 in your SMSF and a 70% loan-to-value ratio (LVR), you could purchase a $666,000 property.
If the property grows in value over time, the capital growth is magnified—all within the tax-advantaged environment of superannuation.
2. Tax Efficiency
Rental income is taxed at just 15% while the fund is in accumulation phase (and 0% in pension phase).
Capital gains on properties held longer than 12 months are taxed at an effective 10%.
Upon retirement (transition to pension phase), both income and capital gains become tax-free in most cases.
This creates a significant tax advantage compared to holding the property in your own name.
3. Asset Protection
The LRBA structure ensures that the property is isolated from the rest of the SMSF’s portfolio. In the event of loan default, only the underlying asset can be repossessed—not the rest of the fund’s assets, offering a layer of risk mitigation.
4. Control and Flexibility
Owning property via an SMSF gives members direct control over:
The type of property purchased (residential or commercial).
Tenants (subject to arms-length rules).
Management of the property and exit strategy.
This level of control is rarely possible with traditional superannuation funds.
Residential vs Commercial Property in SMSFs
Both residential and commercial properties can be purchased under LRBAs, but there are notable differences:
Residential Property
Cannot be lived in by a member or related party of the SMSF.
Cannot be rented to a member or related party.
Often considered lower risk, but yields are typically lower than commercial.
Must be a new purchase; you cannot transfer a residential property you already own into your SMSF unless it’s a business real property (which is rare).
Commercial Property
Can be leased to a related party, such as your own business, provided it’s done at market rent and with formal lease agreements.
Higher rental yields are common, but market demand may be more volatile.
Can offer greater tax benefits and flexibility for small business owners looking to secure premises.
Commercial real estate is particularly popular among self-employed professionals and small business owners who want to own their business premises through their SMSF.
Risks and Considerations
While the benefits are compelling, SMSF property investment is not suitable for everyone.
1. Liquidity Risk
Property is illiquid. If the SMSF needs to pay out a benefit or meet expenses (such as a death benefit), and lacks sufficient liquid assets, the fund may be forced to sell the property—possibly at an inopportune time.
2. Loan Restrictions
SMSF loans are more conservative than personal home loans:
Typically require 20–30% deposit plus costs.
Interest rates are often higher than standard loans.
Fewer lenders offer SMSF loans than traditional home loans.
3. High Upfront and Ongoing Costs
LRBAs involve significant setup and compliance costs:
Legal fees, trust setup costs, lender fees, and ongoing audit and accounting costs.
Complexity can require ongoing management and monitoring.
4. Regulatory Compliance
Breaching superannuation rules can result in hefty penalties. Common breaches include:
Renting a residential property to a relative.
Using borrowed funds for renovations (only repairs allowed under LRBAs).
Not maintaining correct documentation.
That’s why it’s essential to engage qualified professionals at every step.
The Role of Professional Advice and an Experienced SMSF Broker
Getting SMSF property investment right isn’t just about choosing the right property—it’s about structuring it properly from the outset.
Why Professional Advice is Crucial
A financial adviser can determine whether property aligns with your fund’s investment strategy.
An accountant ensures the fund complies with ATO rules and assists with tax and audit requirements.
A legal professional will help with setting up the necessary trust structures (bare trust, corporate trustee, etc.).
An experienced mortgage broker who specialises in SMSF lending can guide you through:
Which lenders are currently active in the SMSF loan market.
Structuring the LRBA loan to meet servicing criteria.
Managing loan-to-value ratios, loan terms, and documentation.
Given the complex nature of SMSF loans and compliance requirements, working with a broker who regularly arranges LRBAs is critical. They’ll understand lender policies, common pitfalls, and how best to position your application
.
Final Thoughts: Is SMSF Lending Right for You?
Investing in property through an SMSF using an LRBA can be a powerful strategy to build long-term wealth and secure your retirement future. It combines the security and growth of real estate with the tax advantages and control offered by self-managed super.
But this strategy isn’t without risk. It requires thorough planning, financial discipline, and professional guidance. The decision to take on debt inside your super should never be made lightly or without a comprehensive understanding of your fund’s investment goals, cash flow, and compliance obligations.
If you're considering SMSF property investment, the first step is to consult an SMSF-experienced broker and your financial adviser. They’ll help you weigh the pros and cons, determine if borrowing is right for your fund, and walk you through the loan options and structures that best support your goals.
Need Help Navigating SMSF Lending?
At Etairos Finance, we specialise in complex lending scenarios—including SMSF and LRBA arrangements. Our experienced brokers can help you find a lender, understand the requirements, and structure your investment for maximum impact.
Contact us today to see whether SMSF property investment is the right move for your super.
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