What are SMSF Loans for Buying a Unit?

Buying a unit through your self-managed super fund means setting up a Limited Recourse Borrowing Arrangement, where the property sits in a bare trust until the loan is repaid.

The decision you're making isn't whether property belongs in your retirement strategy. You've already decided that. What you need to know is how the structure works, what lenders will actually approve, and whether the rental income will cover the loan without forcing your fund to top up repayments from contributions or existing assets.

How a Limited Recourse Borrowing Arrangement Structures the Purchase

A Limited Recourse Borrowing Arrangement keeps the unit in a separate bare trust until your SMSF repays the loan. The trustee of your fund controls the asset, collects the rent, and makes loan repayments, but the property doesn't formally transfer into the fund's name until the debt is cleared. If your fund defaults, the lender's recourse is limited to the property in the trust. They cannot pursue other assets your SMSF holds, such as shares or cash.

Consider a fund purchasing a two-bedroom unit in Southbank. The unit is titled under a bare trust, with the SMSF as beneficiary. Rent from the tenant flows into the fund's bank account. The fund uses that income, along with any employer contributions or member contributions, to meet the monthly loan repayment. Once the loan is repaid, the unit transfers into the fund's direct ownership.

You cannot use the loan to fund renovations that alter the property's fundamental character while the debt remains outstanding. Repairs such as fixing a leaking tap or repainting are permitted, but adding a second bathroom or reconfiguring the layout is not. The loan covers the purchase only.

Deposit Requirements and Loan-to-Value Ratios for Units

Non-bank and specialist lenders now offer loan-to-value ratios up to 80% for residential property purchased through an SMSF, which means a 20% deposit. This is a shift from the historically conservative range of around 60% to 70%, which required deposits of 30% to 40%.

The actual LVR you're approved for depends on the fund's total asset position, the unit's location, and whether the lender views the property as suitable security. A fund with substantial existing assets and consistent contribution history will have more options than a newly established fund with minimal balance. Units in established apartment buildings close to Melbourne's CBD or in areas with strong rental demand typically receive more favourable assessment than those in oversupplied or regional markets.

Your fund must demonstrate it can service the loan without relying solely on rental income. Lenders assess borrowing capacity by reviewing the fund's cash flow, including contributions, existing income from investments, and projected rental returns. If the rental income falls short of covering the repayment, your fund needs other reliable income streams or sufficient liquid assets to bridge the gap.

The Sole Purpose Test and How It Applies to Unit Purchases

The property must meet the sole purpose test, meaning it exists purely to generate retirement benefits for fund members. Personal use is not permitted. You cannot live in the unit, holiday in it, or allow a family member to occupy it rent-free. The unit must be leased to an unrelated tenant at market rent, and all income flows into the fund.

In our experience, this is where some trustees underestimate the compliance burden. The unit in Southbank mentioned earlier cannot be used by a member's adult child studying nearby, even if they pay rent. If the ATO identifies personal use or non-arm's length arrangements, the fund risks penalties or disqualification.

The sole purpose test also governs how rental income is used. Rent collected must remain within the fund or be applied toward fund expenses such as loan repayments, property management fees, or insurance. It cannot be distributed to members until they meet a condition of release, such as reaching preservation age or retiring.

SMSF Loan Interest Rates and How They Compare

SMSF loan interest rates sit higher than standard investment loans because lenders view the structure as carrying additional risk. The limited recourse nature of the arrangement means the lender cannot pursue other fund assets if the loan defaults, so they price that risk into the rate.

Rates vary depending on whether you choose a variable or fixed structure. Variable rates move with the market and allow for additional repayments without penalty. Fixed rates lock in a set rate for a nominated period, which provides certainty but typically restricts extra repayments and carry break costs if you repay early. At current variable rates, the difference between an SMSF loan and a standard investment loan can range from 0.5% to 1.5%, depending on the lender and the fund's profile.

For related-party LRBAs, where the loan is provided by a related party rather than a commercial lender, the ATO sets a safe harbour interest rate. For the 2025-26 financial year, that rate is 8.95%, down from 9.35% the previous year. Charging below this rate on a related-party loan may trigger compliance issues, as the arrangement must be conducted on an arm's length basis.

Working with an SMSF mortgage broker who compares lenders across the non-bank and specialist space can help you identify which lender offers the most suitable rate and structure for your fund's position. Not all lenders assess SMSF applications the same way, and some are more flexible on LVR or serviceability than others.

Rental Income, Tax Treatment, and Capital Gains Considerations

Rental income your fund receives is taxed at a maximum rate of 15%, which is lower than most individual marginal tax rates. This makes holding investment property within an SMSF tax-effective during the accumulation phase, particularly for members on higher incomes.

Once your fund moves into pension phase, rental income becomes tax-free. The transition typically occurs when a member retires or reaches preservation age and starts an account-based pension. At that point, the unit continues generating rental income, but the fund pays no tax on it.

Capital gains tax also receives concessional treatment. If your fund holds the unit for at least 12 months before selling, it receives a one-third discount on the capital gain, reducing the taxable amount. In pension phase, capital gains are tax-free entirely.

Consider a fund that purchased a unit in Richmond, held it for 10 years during accumulation, then sold it after the member entered pension phase. The entire capital gain would be exempt from tax, which can represent a significant saving compared to holding the same property in an individual's name.

Trustee Training Requirements and Compliance Obligations

New rules require all trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance may result in penalties of up to $19,800, or in severe cases, fund disqualification.

The training ensures trustees understand their legal obligations, particularly around maintaining the separation between the SMSF and personal finances. SMSFs with borrowing arrangements face heightened data-matching and transaction-monitoring from the ATO, so rigorous record-keeping is essential. Every loan repayment, rent receipt, and maintenance expense must be documented and reconciled.

Each loan covers a single property in a separate bare trust, meaning if your fund wants to purchase two units, you need two separate LRBAs. This adds to the administrative complexity and the cost of maintaining the fund, as each arrangement requires its own trust deed, custodian, and compliance tracking.

If you're considering whether your fund has the scale to justify the structure, speak with a mortgage broker who understands the compliance landscape and can walk you through the ongoing obligations before you commit. Call one of our team or book an appointment at a time that works for you.

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