Self-managed super funds, or SMSFs, are a small but steadily growing slice of the Australian super system. Around 653,000 SMSFs hold roughly a quarter of all super assets, even though they only cover about 5% of Australians. The appeal is control: instead of leaving the investment decisions to a big super provider, you make them yourself.
One of the most common questions trustees ask once their fund is set up is whether it can be used to buy property.
The short answer: yes. The longer answer: it’s more involved than buying a property in your own name, the rules are tighter, and the decision about whether it’s a good idea for your fund is one your accountant and financial planner need to be part of.
This article walks through what SMSF lending actually is, how it works, what the costs and risks look like, and where the lending part of the conversation fits in.
What is SMSF lending?
SMSF lending is when your super fund takes out a loan to buy an asset, almost always a property. The fund is the borrower, not you personally. The fund makes the repayments. The fund eventually owns the property.
Super funds aren’t allowed to borrow the way a person can. There’s a special structure they have to use, called a limited recourse borrowing arrangement. Most people just call it an LRBA.
The name sounds technical, but the idea behind it is simple: the lender can only chase the property bought with the loan if things go wrong. They can’t come after the rest of your super.
How SMSF lending works in Australia
SMSF property loans look a bit like a normal home loan from a distance. Up close, the structure is different, the lender list is smaller, and the costs and rules don’t quite match.
A worked example
Let’s say John and Mary have an SMSF with $400,000 in it. They want to buy a $600,000 investment property using the fund.
They put $200,000 of the fund’s money toward the deposit and costs. They borrow the other $400,000 from a lender that does SMSF loans.
Here’s where it gets a little different. The property doesn’t go straight into the SMSF. A separate trust (called a bare trust or custodian trust) is set up to legally hold the property while the loan is being paid off. The SMSF is the real owner behind the scenes.
John and Mary’s fund makes the repayments using the rent the property earns and the regular super contributions going into the fund. Once the loan is fully paid off, the property gets transferred from the bare trust into the SMSF directly.
That’s the basic shape of every SMSF property purchase. The numbers change. The structure doesn’t.
What “limited recourse” actually means
This is the single most important idea in SMSF lending, so it’s worth spending a minute on.
If John and Mary’s SMSF property loses value or the rent dries up, and the fund can’t keep up with the repayments, the lender can take back the property. That’s normal. What’s different about an SMSF loan is that the lender can’t go any further than that.
They can’t touch the rest of the SMSF’s assets. They can’t come after the shares or cash sitting in the fund. They can’t come after John and Mary personally.
That’s what “limited recourse” means. The lender’s ability to recover money is limited to the property the loan was used to buy. To make up for that extra risk, lenders charge higher rates and lend less than they would for a standard home loan. More on that below.
How much you can borrow
SMSF loans are more cautious than standard home loans. As a rough guide:
- For a residential property, lenders usually cap the loan at around 70–80% of the property value
- For a commercial property, that drops to around 65–75%
That means your fund needs to bring more cash to the deposit than a standard home buyer would. It also means you need a clear picture of what’s in the fund before you go shopping.
How much it costs to set up
An SMSF property purchase has more moving parts than a normal one, so the upfront costs are higher. Common costs include:
- Setting up the bare trust (legal fees)
- Reviewing the loan and purchase contracts (more legal fees)
- Stamp duty on the property
- Lender setup fees and valuation fees
- Updates to the SMSF’s trust deed and investment strategy
All up, the additional setup costs (on top of stamp duty) usually land in the low-to-mid four figures. Your accountant or financial planner is the right person to get an exact quote from for your situation.
Who needs to be involved
An SMSF purchase usually involves more people than a regular property purchase:
- Your accountant looks after the fund’s tax position and yearly compliance
- Your financial planner advises on whether the strategy fits the fund’s investment plan
- A solicitor sets up the bare trust and reviews the loan and purchase contracts
- A mortgage broker or lender arranges the loan inside the LRBA structure
- The fund trustees (usually you) make the final calls
Refinancing an existing SMSF loan
If your fund already has an SMSF loan that’s been sitting there for a few years, it may be worth reviewing. Some funds switch lenders to find a better-fitting option, just like with a regular home loan.
The rules around what you can change at refinance are stricter than a normal home loan, though. The new loan has to keep the LRBA structure in place. Things like cashing out equity from the property are generally not allowed.
Things to consider before SMSF lending
SMSF lending isn’t the right move for every fund. Things worth thinking about:
- Liquidity inside the fund. Your fund still has bills to pay. If a member retires and starts drawing a pension, the fund needs cash on hand to make those payments. A worked example: if John and Mary’s $400,000 SMSF puts $200,000 into a property, the fund only has $200,000 left for everything else. That’s often fine while contributions are still coming in. It can become a problem later.
- Setup and ongoing costs. Between legal, lender, and fund administration costs, an SMSF property purchase costs more upfront and more each year than buying in your own name. The benefits need to be big enough to outweigh that.
- The investment strategy. Every SMSF is required to have a written investment strategy. Adding a property usually means rewriting it, often with the help of your financial planner.
- Tax implications. The tax treatment of property held in an SMSF is different to a property in your own name. There are real differences in how rent, capital gains, and deductions are treated. Your accountant is the right person to walk you through what that looks like for your fund.
- Who can rent the property. For residential property, you can’t rent it to yourself, your family, or anyone connected to the fund. It has to be rented to a stranger at market rates. For commercial property the rules are different and a business owner can sometimes rent the property from their own SMSF, which is one of the more common reasons people use SMSF lending.
- What you can do to the property during the loan. During the loan period, you can do repairs and maintenance, but you can’t do major renovations or improvements that change the nature of the property. If you want to add a granny flat or knock down a wall, that’s usually not allowed until the loan is paid off. The rules here are strict and breaching them has serious tax consequences for the fund.
- Less flexibility than a normal home loan. SMSF loans are harder to vary mid-term. Some changes that would be simple on a regular home loan are complicated or unavailable on an SMSF loan.
- The strategy is not a lending question. Whether borrowing inside an SMSF is a good idea for your fund is a question for your accountant and financial planner, not your broker. A broker’s job is the lending side once that decision has been made.
A good SMSF lending conversation includes a frank look at all of these. If a broker is talking about SMSF property as a strategy without pointing you at your accountant or financial planner first, that’s a red flag.
Who SMSF lending suits
SMSF lending tends to come up in situations like:
- An established SMSF with a healthy balance and steady contributions
- Trustees who already work with an accountant and a financial planner
- A clear investment strategy that already includes property
- Business owners looking at the commercial property their business operates from
- Funds with an existing SMSF loan due for review or refinance
It tends to be the wrong fit when:
- The fund is too small to cover the setup costs and still hold a mix of other investments
- Putting most of the fund into one property would leave it short on cash
- The strategy hasn’t been signed off by the fund’s accountant or financial planner
- The SMSF was set up recently and is still finding its feet
The right answer depends on the full picture. Your fund’s balance, your contributions, your existing assets, your strategy, and the lender market all play a part.
How Equity Cube can help
If you’ve already worked through the strategy with your accountant and financial planner and you’re ready to look at the lending side, the next step is comparing what’s available across the SMSF lender market.
That’s the kind of conversation we have at Equity Cube. We compare options across our lending panel for SMSF purchase and SMSF refinance, and walk you through the trade-offs in plain language. If your fund isn’t in a position where SMSF lending is going to work, we’ll tell you that too.