A self-managed super fund (SMSF) can borrow to buy property, but the rules are strict and the penalties for getting them wrong are serious. This guide explains how SMSF loans work, what you can and cannot do, and who they suit.

This article is general information only. SMSF lending involves superannuation and tax law. You should get advice from a licensed financial adviser and your SMSF accountant before acting.

What is an SMSF loan?

An SMSF borrows under a limited recourse borrowing arrangement (LRBA). The property is held in a separate holding trust (often called a bare trust) until the loan is repaid. If the fund defaults, the lender can only claim the property held in that trust, not the fund's other assets. That limited recourse is why lenders charge more and require larger deposits.

The key rules

• Single acquirable asset. The loan must be used to buy one asset, such as one property on one title.
• No improvements with borrowed money. You can repair or maintain the property, but you cannot use the loan to improve it in a way that changes its character, such as adding a granny flat.
• Sole purpose test. The investment must be for the purpose of providing retirement benefits.
• Residential property cannot be used by related parties. You, your family and other related parties cannot live in or rent a residential property owned by your SMSF.
• Commercial property can be leased to your business at market rent and on commercial terms. This is a popular strategy for business owners.

Deposits and lending criteria

Most SMSF lenders lend up to 70% to 80% of the property value, so the fund typically needs a deposit of 20% to 30% plus costs. Lenders also look for:

• A healthy fund balance, often at least $200,000 before the purchase
• Enough liquid funds left over after buying, usually 10% or more of the fund's value
• Reliable contributions and rental income to service the loan
• A corporate trustee is preferred by many lenders

Residential or commercial?

Residential property can offer capital growth and steady rental demand, but nobody connected to the fund can live in it.

Commercial property such as an office, warehouse or shop can be leased to your own business. Your business pays rent into your super instead of to a landlord. Leases are often longer and rents higher than residential.

The costs

• Higher interest rates than standard home loans
• Legal fees to set up the holding trust and loan documents
• Stamp duty and purchase costs
• Ongoing SMSF administration, accounting and audit fees

The risks

• Lack of diversification. A single property can make up most of your fund.
• Liquidity. You cannot sell part of a property to pay a pension or cover costs.
• Vacancy. If the property is empty, the fund still needs to make repayments.
• Compliance. Breaching the rules can lead to significant tax penalties.

Who SMSF property suits

SMSF borrowing tends to suit people with a larger combined super balance, a long time until retirement and the discipline to manage a fund properly. Business owners who want to buy their premises are a common example.

Work with the right team

Only some lenders offer SMSF loans, and their criteria differ widely. We work alongside your accountant and adviser to find the right lender. Learn more about SMSF loans or book a free call.

This article is general information only and does not take into account your objectives, financial situation or needs. Government schemes, tax rules and lender policies change, so check current details before acting. Propple Pty Ltd is an Australian Credit Representative (537767) of AFSL 384704.