If you’re considering buying property with self-managed super fund loans, read this first!
This article covers how SMSF loans work for property investment in Melbourne. It outlines the key benefits and risks, along with the eligibility and requirements for 2025, giving you a clear and up-to-date understanding of SMSF lending rules.
How self managed super fund loans work for property investment in Melbourne
Limited Recourse Borrowing Arrangements (LRBAs)
In Australia, self managed super funds (SMSFs) can legally invest in property using a specific loan structure known as a Limited Recourse Borrowing Arrangement (LRBA). Under this arrangement, the SMSF borrows money to purchase a property, securing the loan solely against the acquired asset. This means if the loan defaults, it limits the lender’s recourse to the property itself, while other SMSF assets remain safe. This structure allows you to diversify your super portfolio with direct property investment, while managing risk through asset isolation.What types of property can you buy with a self managed super fund loan?
SMSFs are legally allowed to invest in residential properties and commercial properties, but the rules around use are quite strict. You can read SMSF property investment guidance to better understand these restrictions. If you purchase residential property through an SMSF, no members of the fund or relatives can live in or rent it, even if they pay market rent. This ensures the investment serves the sole purpose of a retirement benefit. Commercial property offers more flexibility. You can lease it to a related party, such as a business run by a fund member, provided you do it at market rates and on commercial terms. This makes commercial property a popular choice for business owners.SMSF loan terms
SMSF loans usually require a substantial upfront deposit, often in the 20–30% range or more of the property’s value. Because these are limited recourse loans, lenders offset their risk with stricter terms. You typically make loan repayments using rental income from the property, along with ongoing super contributions. Your SMSF must ensure enough liquidity in the fund to cover repayments, maintenance and other property-related expenses without breaching superannuation rules.Key benefits & risks of buying property with an SMSF loan
Benefits
- Tax advantages – SMSFs pay only 15% tax on rental income during what’s known as the accumulation phase. Once the fund enters the pension phase, rental income and capital gains may become entirely tax-free.
- Control over investments – You can select properties that match your SMSF’s investment goals. This gives you greater control compared to traditional superannuation funds, which make investment decisions with no input from you.
- Asset protection – Owning property through an SMSF separates it from your personal assets, which can help shield you from legal claims or personal financial issues.
Risks
- Liquidity issues – Property is a long-term, physical asset. It is difficult to sell quickly if your SMSF needs cash to make pension payments or cover unexpected expenses.
- Higher costs – Establishing and maintaining an SMSF involves fees for compliance, administration, and professional advice. These costs can add up over time, so you need to ensure you have the balance of super to make an SMSF worthwhile.
- Regulatory risks – SMSFs must strictly follow complex rules. Even accidental breaches can lead to severe tax penalties and legal consequences. This is why you need an expert broker who understands the complexities of SMSF lending.
- Limited property use – SMSFs cannot purchase properties to live or holiday in, restricting how you can enjoy the property.
Eligibility & requirements for SMSF property loans in 2025
Fund requirements
- Your SMSF must be fully compliant with all current ATO regulations to qualify for a property loan.
- The fund needs to have an established and documented investment strategy that specifically includes property investment as part of its objectives.
Loan requirements
- Loan-to-Value Ratio (LVR) limits typically range between 60–80%, meaning larger deposits are often necessary.
- Trustees must demonstrate sufficient SMSF contributions and/or rental income to comfortably service the loan repayments.
- Lenders apply stronger scrutiny to the SMSF’s liquidity and investment diversification to ensure the fund can meet its obligations without excessive risk.
Lender requirements
- SMSFs must show they can meet ongoing loan repayments even if the property remains vacant for some time.
- Some lenders set minimum SMSF asset balance requirements, often starting around $200,000 or more, to qualify for a property loan.
- These criteria help ensure the fund remains financially stable throughout the loan term.
Secure your SMSF property investment in Melbourne
Lend & Co’s expert team understands the requirements of SMSF property finance in Australia, and guides you through every step of your property investing journey, offering tailored solutions that help you invest wisely and compliantly.
Contact us today for more information.
