SMSF Home Loans

An SMSF cannot simply take out a mortgage. It borrows through a limited recourse borrowing arrangement, which is a defined structure with specific parts.

1. 01The fund borrows from a lender to acquire a single asset.
2. 02The asset is held in a separate holding trust, often called a bare trust, by a custodian trustee.
3. 03The fund makes the repayments and receives the rent and any capital growth.
4. 04Legal title transfers to the fund once the loan is repaid.
5. 05The lender’s recourse is limited to that asset. If the loan defaults, the lender can take the property and cannot pursue the fund’s other assets.

That limited recourse is the feature that gives the structure its name and most of its cost. Because the lender can only reach one asset, pricing sits above standard residential lending and LVRs are more conservative.

LRBA

Limited recourse borrowing arrangement. The only structure through which a self-managed fund can borrow to acquire an asset.

Holding trust

Also called a bare trust. The separate trust that holds legal title to the asset until the loan is repaid.

Custodian trustee

The trustee of the holding trust, and the name the purchase contract must be entered in. Getting this wrong is expensive to correct.

Single acquirable asset

One arrangement funds one asset. Two titles generally need two arrangements, which changes both the cost and the structure.

Business real property

Property used wholly and exclusively in a business. The one category a fund can acquire from a related party and lease back at market rent.

Sole purpose test

Everything the fund does must be for members’ retirement benefits. Personal use of a fund asset breaches it.

Each of these has consequences the fund’s auditor will look for. They are not lending questions. They are compliance questions, and the answers belong with your SMSF accountant and adviser before a contract is signed.

The SMSF lending market has narrowed considerably over the last decade, with several major banks exiting it. The lenders who remain, mostly non-bank and specialist, apply consistent themes.

Residential LVR

About 80%

Trustee

Corporate, usually

After settlement

Liquidity retained

Before anything

Licensed advice

The two are treated very differently, and the difference is the reason most business owners look at this structure at all.

Where a business owner wants their trading premises held inside super and leased back to the business, the lending sits closer to commercial than residential. Our SMSF commercial page covers that route in more detail.

1. 01

   Advice and strategy

   Your licensed adviser confirms the approach suits the fund and the members, and the investment strategy is updated to reflect it.

2. 02

   Structure established

   Trust deed reviewed for borrowing power, holding trust and custodian trustee established, corporate trustees in place where required.

3. 03

   Indicative lending position

   We confirm which lenders will consider the fund, the LVR available and the liquidity they expect to see retained.

4. 04

   Contract signed correctly

   In the custodian trustee’s name, with your solicitor confirming the wording before signing.

5. 05

   Application and assessment

   Fund financials, member statements, contribution history and the property go to the lender. Expect a longer assessment than a standard loan.

6. 06

   Approval, documents and settlement

   Loan documents are executed by the correct trustees. Settlement is coordinated with your solicitor and accountant.

7. 07

   Ongoing compliance

   The fund’s auditor reviews the arrangement annually. Keep the documentation, the lease and the repayments clean.

Refinancing an existing LRBA is permitted, and it is a live issue for many funds whose original lender has since left the SMSF market and left the loan sitting on a legacy rate.

• The refinance must not change the asset or add to the borrowing beyond what the rules permit.
• The existing holding trust generally continues rather than being replaced.
• The new lender will assess the fund afresh, including balance, liquidity and contribution history.
• Related-party loans to the fund have their own safe harbour terms, which your SMSF accountant should confirm before restructuring one.
• Costs and duty consequences should be checked with your accountant before you commit, because a change to the structure can be treated as a new acquisition.