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Limited Recourse Borrowing Arrangements (LRBA) Explained

A limited recourse borrowing arrangement, or LRBA, is the only common way a self-managed super fund can borrow to buy property. The name sounds complicated, but the idea is simple once you break it down.

What "limited recourse" means

With a normal loan, if you can’t repay, the lender can chase your other assets. With an LRBA, the lender’s claim is limited to the one asset the loan paid for. If the fund defaults, the lender can take that property, but not the rest of your super.

Because the lender carries more risk, LRBA loans usually need a bigger deposit and have higher rates than standard investment loans.

How it is set up

  1. Your SMSF signs the contract through a holding trust, also called a bare trust. The holding trust’s trustee holds legal title to the property.
  2. Your SMSF pays the deposit and costs and takes out the loan.
  3. The property is held in the holding trust, for the benefit of your SMSF, while the loan is in place.
  4. Rent goes to the SMSF, and the SMSF makes the loan repayments.
  5. When the loan is paid off, the property can be transferred to the SMSF.

The key rules

  • One asset per loan: the loan must buy a single asset. Two properties on separate titles usually need two separate LRBAs.
  • Repairs yes, improvements no: borrowed money can pay for repairs and maintenance, but not improvements. You can’t use the loan to renovate significantly, extend or build.
  • No changing the asset: the property must stay the same asset. Turning a house into a block of units, for example, changes its character.
  • The sole purpose test: the investment must be for members’ retirement. Residential property can’t be lived in or rented by members or relatives.
  • Related party loans: you can lend to your own SMSF, but the loan must be on commercial terms that follow ATO guidelines.

Common mistakes

  • Signing the contract in the wrong name before the trusts are set up
  • Using loan money for renovations
  • Buying two properties under one loan
  • Not keeping records of rent and expenses for the fund

These can lead to ATO penalties or the arrangement breaching super law. Your accountant and SMSF auditor should review the setup.

How we help

We find a lender whose LRBA rules fit your plans, and coordinate with your accountant and solicitor so the trusts and contract are set up in the right order. Read more on SMSF loans or SMSF loan eligibility.

Talk to us about an LRBA

Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. SMSF loans are complex. We arrange the loan only. Get advice from a licensed financial adviser and your accountant about whether an SMSF or property investment suits you.