5 Things You Need to Know About SMSF Loans

1. How SMSF loans differ from standard investment loans

Unlike a standard investment loan, an SMSF loan is designed specifically for a superannuation fund to purchase a residential or commercial investment property. The property is held in a separate trust (called a bare trust or holding trust) until the loan is repaid. For more guidance, see MoneySmart’s overview of SMSFs and property

Key differences between a standard loan and an SMSF loan include:

• Eligibility requirements – Not every SMSF can borrow money to buy property. The fund must be compliant with ATO regulations and have a trust deed that allows borrowing.
• Higher scrutiny – Lenders often require a larger deposit (typically 20–30%), higher interest rates and stricter serviceability assessments.
• Limited recourse borrowing – The loan is secured only against the property, protecting other SMSF assets.

2. Compliance rules apply

SMSF loans are heavily regulated to ensure they align with superannuation law. Melbourne investors must follow strict compliance rules:

• Sole purpose test – The property must be held purely for investment benefits, not for personal use.
• Related party restrictions – You generally can’t lease the property to yourself, relatives or related entities.
• Loan structure requirements – Borrowing must be arranged under a Limited Recourse Borrowing Arrangement (LRBA), see the ATO’s guidance on SMSF borrowing restrictions.
• Ongoing reporting – As the trustee of an SMSF, you must ensure proper documentation, audits and reporting to the ATO.

Failing to follow Australian regulations can result in severe penalties and even the loss of SMSF compliance status.

3. Benefits of SMSF Loans for Melbourne investors

Borrowing through your super fund can bring several advantages:

• Leverage super savings – Drawing on your super may enable you to purchase higher-value properties than you could with your savings or equity.
• Tax efficiency – Rental income from your property generally qualifies for a concessional rate of 15%. If you hold it into pension phase, rental income and capital gains may even become tax-free.
• Diversification – An SMSF property can balance out your other superannuation investments and give you a more varied portfolio.
• Melbourne property market potential – Melbourne’s historically strong property growth means you are likely to experience a positive outcome if you buy strategically.

4. Risks and limitations 

While the potential benefits are appealing, SMSF loans come with notable risks:

• Reduced liquidity – Property is likely to tie up a large portion of your super savings, making it harder to diversify.
• Cash flow strain – You need to take into account that your super fund money will be used for loan repayments, property costs and compliance fees.
• Market risks – Property values can fall, particularly in certain Melbourne suburbs that may be oversupplied.
• Higher borrowing costs – SMSF loans generally attract higher interest rates, fees and stricter lending terms.
• Exit challenges – Selling a property within an SMSF can be complex and you need to have a flexible timeline.

5. Local considerations for Melbourne investors

Location is critical when you buy property through your SMSF. Melbourne’s property market is diverse and factors such as infrastructure development, rental demand and zoning changes can significantly influence returns.

It’s recommended that you:

• Research rental demand in suburbs with consistent tenant appeal.
• Be cautious about buying off-the-plan or high-rise apartments which may have limited growth potential.
• Seek professional advice to balance property investment with the broader SMSF strategy.

SMSF loans can open the door to significant investment opportunities but they are not a one-size-fits-all solution. They require careful planning, strict compliance and a clear long-term strategy.

If you’re considering using your super to purchase Melbourne property, professional guidance is essential, in the form of your SMSF Manager and an experienced local SMSF loan broker who specialises in this type of loan.