Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 273

Heed my problems borrowing in my SMSF

SMSFs have enjoyed the ability to borrow to buy property since 2007. However, with the recent crackdown on lending criteria, many options for finance have disappeared from the market.

An SMSF can borrow to acquire an asset provided it complies with the requirements of section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA). This arrangement is commonly referred to as a limited recourse borrowing arrangement (LRBA), where the rights of the lender in the event of default are limited to the asset held under the LRBA. This is not the case for most other loans, which generally have no such recourse limitation, for example, business loans, home loans, investment loans and personal loans. Consequently, the application process is generally more onerous, takes longer and will have less favourable terms, for example a higher interest rate than a similar loan without any recourse limitations.

In considering an LRBA, the source of finance is as crucial as ensuring the LRBA complies with the relevant rules. Even where the LRBA satisfies all the legislative hurdles, failure to secure finance can prove costly for the SMSF.

Obtaining a loan is harder

Starting a few years ago and gathering pace recently, we have seen many lenders either withdraw completely from this space or tighten the lending criteria. I have personally experienced this change with my own SMSF attempting to obtain finance to buy a recently-completed townhouse, just one hour north of the Brisbane CBD. I approached many lenders and went through many arduous application processes, only to come up against a 'no' each time. One of the issues is the requirement for the lender to obtain their own valuation of the property. The difference in valuation on the same property was considerable, ranging from purchase price to $90,000 below. Generally, a value more than 10% below purchase price will see the loan application fail.

Another hindrance has been loan-to-value ratios (the amount a financier will lend as a proportion of the property’s value), which I’ve seen drop as low as 50%. Be prepared to kick in extra cash from the SMSF, as the days of 80% LVRs are long gone.

Even where you meet all the relevant criteria, you can still come up short with a lender’s 'minimum loan amount' condition. I had the experience with one lender where I seemingly met all the requirements, the maximum amount that their lending model said my SMSF could borrow was acceptable, yet the amount was below their minimum loan amount of $250,000.

If you hit a brick wall, then what?

So, if your SMSF has entered into an LRBA, signed a contract, but can’t obtain the finance, what are the options?

First, make sure when the purchase contract is signed that it contains the relevant ‘subject to finance at purchaser’s choice’ clause and obtain legal advice on this before executing the contract. This may give you the option to withdraw from the contract. It's also best to seek legal advice if you believe the fund cannot settle due to being unable to obtain finance.

Second, consider a related party loan. Do you have the ability to borrow against non-super assets and on-lend to your SMSF? Of course, you will have to either comply with the related party lender safe harbour rules, or have evidence that the loan is on commercial terms. This second option may be difficult given many finance institutions may not be willing to lend to your SMSF.

Third, are you able to make a contribution to the fund to assist with the settlement? Be careful though, if you end up with sufficient monies to settle without the need for finance, but the purchase has been done via an LRBA.

Under an LRBA, the SMSF invests in a related trust (a bare trust), and therefore, prima facie, an asset funded by an LRBA is an in-house asset (IHA). However, the regulator has effectively exempted an LRBA from being considered an IHA, provided the LRBA is used for its intended purpose. If not, and there is no actual money borrowed as part of the LRBA, the exemption does not apply and the LRBA is treated as an IHA.

Consequently, where the SMSF can settle on the purchase of a property without the need for finance, but the contract has been entered into under an LRBA, consideration should be given to having a small related party loan. This related party loan could be repaid soon after settlement, however, as the LRBA included a loan amount, the legislative instrument IHA exemption would apply. There would also be the option of rescinding the original contract and executing a new contract in the name of the SMSF’s trustee. However, this requires extreme care and depends on the state jurisdiction. Consultation with a lawyer would be advised to ensure no adverse stamp duty outcomes.

Satisfy all the rules

When it comes to LRBAs, whilst it is important to ensure all the requirements under the law are satisfied, in my experience its equally important to focus on where the funding will come from. And with more lenders withdrawing from this space, this may be easier said than done.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a sponsor of Cuffelinks and a leading provider of innovative SMSF services, training, and administration. This article is general information only and does not consider the circumstances of any individual.

For more articles and papers from SuperConcepts, please click here.

RELATED ARTICLES

Sole purpose test needs level playing field

7 vital steps to compliance for your SMSF

Oh dear, not another glitch with borrowing in SMSFs

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.