Can I borrow to buy property inside an SMSF?

Buying property inside a self managed super fund using borrowed money is possible, but it is one of the most heavily regulated and complex areas of lending. It is essential to approach it with proper licensed advice. Here is a general overview of how it works and the cautions involved.

How SMSF borrowing works

A self managed super fund can borrow to buy property only through a specific structure called a limited recourse borrowing arrangement. Under this arrangement the property is held in a separate trust, and the lender recourse is limited to that property rather than the fund other assets. This structure is required by the superannuation rules.

Strict rules apply

SMSF borrowing must comply with strict superannuation and tax requirements, including rules about the type of property, how it is used, and what can and cannot be done with it. For example, there are limits on improvements to a property bought with borrowed funds. Getting these rules wrong can have serious consequences for the fund.

Fewer lenders, larger deposits

Not many lenders offer SMSF loans, and those that do generally require a larger deposit, meaning a lower maximum loan to value ratio, than a standard loan. The pool of lenders is smaller and the terms are more conservative, reflecting the specialised and limited recourse nature of the lending.

Residential and commercial differ

SMSF borrowing can apply to both residential and commercial property, but the rules and lender appetite differ between them. Commercial property, particularly business premises used by a related party under specific conditions, is treated differently to residential, so the type of property matters.

It is a superannuation decision first

Borrowing inside an SMSF is fundamentally a superannuation and investment decision, not just a lending one. It affects your retirement savings and must fit the fund investment strategy and the trustees obligations. This is why it cannot be approached as a simple property purchase.

Licensed advice is essential

Because of the complexity and the rules involved, licensed financial advice, along with accounting and often legal advice, is essential before borrowing in an SMSF. This is a regulated area where appropriate professional advice is not optional, and nothing here is a substitute for it.

Approach it carefully and properly

Because SMSF lending is specialised and tightly regulated, the useful step is to assemble the right advisers and a lender experienced in these arrangements. A broker who works with SMSF lending can identify suitable lenders, usually at no cost to you, alongside your licensed financial adviser and accountant. This is general information, not financial advice, and you should obtain licensed advice before proceeding.