Understanding SMSF Loans: A Guide for Investors | Loan Central Hub

Self-Managed Super Funds (SMSFs) have become an increasingly popular way for Australians to invest in property while building their retirement savings, as these assessments generally do not impact your personal financial position. However, purchasing property through an SMSF is more complex than buying property in your own name. It requires a clear understanding of the structure, legislation, and how SMSF loans are assessed. At Loan Central Hub, we’re here to break it down simply for you.

1. SMSF Property Investment: The Basic Structure

When an SMSF purchases a property with borrowed funds, it must do so under a very specific structure to comply with the law:

• SMSF Trust: This is your main super fund, which holds members' retirement savings and oversees the investment strategy.

• Bare Trust (Holding Trust): A separate trust is created to legally hold the title to the property. The SMSF holds a beneficial interest in the property, but the legal title sits with the Bare Trustee until the loan is fully repaid. The Bare Trust generally only holds 1 asset/property per Trust.

This structure ensures that the lender’s rights are limited solely to the property being purchased under a Limited Recourse Borrowing Arrangement (LRBA).

2. The Legislation You Need to Know

SMSF property investment is governed by the Superannuation Industry (Supervision) Act 1993 (SIS Act), specifically the provisions around LRBAs.

Key compliance rules include:

• The SMSF must buy a single acquirable asset (or collection of identical assets, e.g., shares).

• The loan must be limited recourse, meaning the lender can only access the secured property if the SMSF defaults.

• The investment must meet the "sole purpose test" – it must solely benefit the members' retirement savings. In practice, this generally means a Statement of Financial Advice from a Financial Planner for new to SMSF clients outlining why SMSF strategies are beneficial to them. From a lending perspective, there is 1 lender who

• SMSFs cannot use residential properties purchased via SMSF for personal use.

• Related-party transactions must comply with strict rules (especially around leasing).

• You cannot ‘release equity’ or increase the loan amount of an SMSF loan.

Failure to comply can cause the fund to become non-compliant and incur heavy tax penalties.

3. How Lenders Assess SMSF Loans

Lenders apply stricter assessment criteria to SMSF loans compared to standard home loans. Here's what they typically look at:

• Loan-to-Value Ratios (LVRs):

  • Residential SMSF properties usually have a max LVR of around 80-90%.

  • Commercial SMSF properties generally have a lower max LVR, around 70-80%. Property specialisation and relevant LVRs still apply (i.e. if the property is a specialised commercial property like a boarding house or childcare centre etc., expect 50%)

• Fund Financials:

  • Many Lenders have requirements such as a minimum net asset position within the SMSF or liquidity tests.

  • Recurring income can be assessed in a multiple of ways depending on the scenario. The standard assessment relies on your historical super-contributions into your SMSF/industry superfund with the market rent of the property being purchased.

• Rental Income:

  • The market rent is used for loan affordability purposes. Legally, the tenant must pay market rent with investment properties, which plays a large role depending on the scenario. An example of this is if an SMSF is buying a commercial property to rent back to a related party trading entity, where the trading entity is also financial assessed to confirm that they can afford the market rent.

• Additional Contributions:

  • Certain lenders allow additional assessment outside of the LRBA structure. They are able to assess your personal financial position and consider any available surplus to the net cashflow position as potential super contributions to assist with loan affordability assessment.

• Other Requirements:

  • Higher interest rates compared to standard loans.

  • No redraw facilities, no line of credit features. Some lenders may offer offset accounts for residential SMSF loans, but as these loans are predominantly written in the non-bank segments, a lot of ‘bank comfort features’ do not apply.

  • Cash buffers are usually required (e.g., 5-10% of the loan amount in liquid assets to remain after settlement, buffers for loan repayments if a residential property is currently untenanted etc.).

4. Residential vs Commercial SMSF Property Investment

Residential SMSF

Residential property investment under an SMSF comes with some important restrictions:

• The property must be purely for investment purposes.

• You cannot buy a house and rent it to yourself, your family, or any related parties. The tenancy must be at an arms length

• Residential SMSF loans are more widely available through a greater number of lenders as compared to commercial.

Commercial SMSF

Commercial property investment provides a little more flexibility:

• The property can be leased to a related party (e.g., your own business), provided it’s on full commercial, arm’s-length terms or as standard investment to a third party tenant.

• This option can be particularly beneficial for business owners wanting to own their business premises inside their SMSF. This option is particularly attractive for business owners looking to protect assets during volatile periods such as COVID, whereby the assets are protected even if the trading business liquidates.

• Lenders may view commercial properties as higher risk, meaning stricter terms and valuations apply. Some lenders also have options to assist with CGT costs etc. when transferring already owned assets into an SMSF structure.

Conclusion

Investing in property via an SMSF can be a powerful strategy for growing your retirement nest egg. However, the complexities of the structure, legislation, and lending criteria mean that expert guidance is essential.

At Loan Central Hub, we specialise in helping our clients navigate the SMSF lending journey with confidence. Whether you're considering residential or commercial property, we're here to guide you every step of the way.

Get in touch with us today to learn more about SMSF lending opportunities.