SMSF Borrowing & LRBA Strategies 2026

What Is a Limited Recourse Borrowing Arrangement (LRBA)?

An LRBA is the only legal mechanism that allows an SMSF to borrow money to purchase an asset. The name describes the lender's security position: the lender has "limited recourse" to the SMSF's assets — if the SMSF defaults, the lender can only recover the specific asset held in the bare trust, not the other super assets in the fund.

This protection for the SMSF's other assets is also why SMSF loans are treated more cautiously by lenders — they cannot take the borrower's other super savings as security, so they require higher deposits and more stringent serviceability assessments than standard investment lending.

The Four Parties in an LRBA

Unlike a standard mortgage, an LRBA involves four distinct parties:

• 1.
  SMSF Trustee — your SMSF, which has the beneficial interest in the property and receives all rental income and capital growth.
• 2.
  Bare Trustee (Custodian) — a separate legal entity (usually a special purpose company) that holds legal title to the property during the loan period. The bare trustee has no beneficial interest — they simply hold title on behalf of the SMSF.
• 3.
  Lender — the bank or related party providing the loan. Their security is only against the property in the bare trust.
• 4.
  Property — the single acquirable asset being purchased. An LRBA can only be used to buy one asset per arrangement.

What Your SMSF Actually Needs to Qualify for an LRBA

SMSF lending criteria are stricter than standard investment lending. Lenders are assessing both the fund's ability to service the loan and its compliance standing. Here is what most SMSF lenders require in 2026.

Minimum Fund Balance

Most lenders require a minimum SMSF balance of $250,000–$300,000 before considering an LRBA application. Some require $350,000+. This threshold exists because lenders want confidence the fund can service the loan if the property sits vacant for 3–6 months and still cover ongoing fund administration costs.

Deposit Requirements by Property Type

SMSF loan deposits are significantly higher than standard investment lending:

Serviceability Assessment

Lenders assess the SMSF's ability to service the loan primarily using the projected rental income from the property — typically at a rate of 7–8% to stress-test cashflow. They will also look at member contributions (salary sacrifice and personal deductible contributions going into the fund), and the SMSF's existing assets.

Note: lenders do not consider members' personal income in the same way a standard investment loan would. The SMSF must service the debt primarily from within the fund. If the projected rent barely covers the repayments, most lenders will decline the application — they want a buffer.

SMSF Loan Interest Rates in 2026

SMSF loans are priced at a premium to standard investment property loans — typically 0.5–1.5% higher. In the current rate environment, this means most SMSF residential loans sit at 6.5–7.5% per annum for principal and interest, or 7–8% for interest-only.

Related Party LRBA Loans: The Rules You Must Follow

Instead of borrowing from a bank, an SMSF can borrow from a related party — for example, a family trust, unit trust, or a private lender who is related to a member. Related party loans are legal but must strictly comply with the ATO's safe harbour provisions, or the rental income and gains will be taxed at 45% as non-arm's length income (NALI) instead of the normal 15%.

ATO Safe Harbour Terms for Related Party Loans (2026)

To avoid NALI treatment, a related party LRBA for residential property must meet ALL of the following:

• Interest rate: at least the ATO's published indicator rate (RBA housing investment rate + 2% for residential; separate rates for commercial)
• Loan term: maximum 15 years for residential property
• Repayment type: principal and interest only — interest-only is not permitted under safe harbour
• LVR: maximum 70% for residential, 65% for commercial at loan establishment
• Security: a registered mortgage over the property held by the bare trust
• All terms documented in a formal loan agreement before settlement

The ATO publishes updated safe harbour interest rates periodically. Check the ATO website for the current rate before structuring a related party loan — using a rate that is even slightly below the safe harbour threshold can trigger NALI.

The Bare Trust: What It Is and Why It Matters

The bare trust (also called a holding trust or custodian trust) is the legal mechanism that makes an LRBA work. Understanding it properly prevents one of the most common SMSF property mistakes.

How the Bare Trust Structure Works

When your SMSF settles on a property using an LRBA, the legal title is registered in the name of the bare trustee — not the SMSF trustee. The bare trustee is typically a special purpose company (separate from your SMSF corporate trustee) set up solely for this purpose. Cost to establish: $1,500–$3,000 including the bare trust deed and ASIC registration.

Despite holding legal title, the bare trustee has no beneficial interest in the property. All rental income flows to the SMSF. All maintenance decisions are made by the SMSF trustee. The bare trustee simply holds the legal title as a formality of the LRBA structure.

When the SMSF repays the loan in full, the property's legal title transfers from the bare trustee to the SMSF trustee. This is a straightforward legal process that does not trigger stamp duty in most states (some states require careful management — check with your conveyancer).

Why You Cannot Improve the Property During the Loan

Under LRBA rules, you can repair and maintain the property, but you cannot make improvements that change the character of the asset while the bare trust is in place. Adding a new bedroom, building a granny flat, or undertaking major renovations that change the property's nature breaches the LRBA rules. The asset must remain in essentially the same form it was purchased in until the loan is repaid. Maintenance (fixing a roof, replacing appliances, repainting) is fine — transformation is not.

Principal & Interest vs Interest Only: Which Suits Your SMSF?

Most SMSF investors default to interest-only thinking it preserves cashflow — but for SMSF property, the calculus is different.

The Case for Principal & Interest

Principal and interest repayments build the SMSF's equity faster. Once the loan is repaid, the full unencumbered property value sits within the fund — compounding tax-free if members are in pension phase. On a $500,000 loan at 7% over 25 years, the total interest paid is approximately $624,000. Switching to P&I from the start rather than 5 years IO saves around $85,000 in interest over the life of the loan.

P&I is also mandatory for ATO safe harbour related party loans — if you are using a related party lender and want to avoid NALI, interest-only is not an option.

When Interest Only Can Make Sense

Interest-only periods (typically 1–5 years with SMSF lenders) can be useful when the fund is in the early accumulation stage and cashflow is tight — particularly if the property has a lower yield and the fund needs to preserve cash for maintenance, admin costs, and vacancy risk. The trade-off is higher total interest cost and the IO period eventually ending with a higher P&I repayment.

LRBA Lending: What Lenders Actually Look For

SMSF lenders conduct a more detailed assessment than standard investment lenders. Understanding what they look for helps you prepare a stronger application.

Fund Compliance History

Lenders will want evidence that the SMSF is compliant — typically the last two years of financial statements and the most recent audit report. A fund with audit qualifications (noted compliance issues) will struggle to get approved. This is another reason to ensure your SMSF is properly administered from day one: compliance breaches can block your ability to borrow.

Investment Strategy Documentation

Your SMSF investment strategy must specifically address property investment as an intended asset class, and must note that borrowing is contemplated. If your existing investment strategy says nothing about borrowing or property, update it before applying for an LRBA — lenders will ask for it and it must pre-date the loan application.

Cash Buffer Requirements

Most lenders want to see at minimum 12 months of total loan repayments held in the fund after the purchase settles. Some require more. For a loan with $3,500/month repayments, that means keeping $42,000 in cash or liquid assets in the fund after settlement — not tied up in the property. This liquidity requirement is a real constraint on how much your SMSF can spend on the property.

Case Study: SMSF Buying a $700,000 Brisbane Townhouse

Let's walk through a complete LRBA purchase to illustrate exactly how the numbers work in 2026.

LRBA Exit Strategies: What Happens When the Loan Is Repaid or Property Sold

Many SMSF investors focus on the entry into the LRBA but don't plan for the exit. Getting the exit right determines whether you realise the full tax advantage of the SMSF structure.

Option 1: Repay the Loan in Full

Once the LRBA is fully repaid, the bare trustee transfers legal title of the property to the SMSF trustee. This transfer is typically stamp duty-exempt in most Australian states when it is genuinely moving the title from the bare trust to the SMSF as part of the LRBA completion — but confirm with your conveyancer as rules vary by state and circumstances.

Once the property is fully owned by the SMSF (no LRBA in place), the in-house asset restrictions on improvements no longer apply — you can now renovate, extend, or develop the property within the SMSF's normal investment rules. This can unlock significant value if you chose a property with development potential.

Option 2: Sell the Property

Selling the SMSF property while the LRBA is outstanding is entirely permissible. The proceeds from the sale are used to repay the outstanding loan, with the remaining equity flowing back into the SMSF's investment pool. The capital gain is assessed in the financial year the contract becomes unconditional (not settlement date).

The critical tax timing decision: if any members are approaching pension phase, coordinate the sale timing so the capital gain falls in the year the member has fully commenced their pension. A sale that generates a $400,000 capital gain in full pension phase creates zero CGT. The same sale one financial year earlier (accumulation phase) creates approximately $40,000 in CGT (after one-third discount). This timing decision alone can be worth tens of thousands of dollars.

Restrictions: What You Cannot Do During the LRBA

While the LRBA is active, you cannot: refinance the loan to access equity (unlike personal investment property), use the property as security for any other loan or purpose, sell a partial interest in the property, or transfer the property to a related party at less than market value. These restrictions apply until the loan is fully repaid and the title transfers to the SMSF.

Common LRBA Structuring Mistakes That Cause Serious Problems

LRBA mistakes are particularly costly because they often are not discovered until years later — during an ATO audit, when trying to sell the property, or when the auditor flags the structure. By that point, fixing the problem may cost more than the original saving.

Using the Wrong Bare Trustee

The bare trustee must be a separate entity from the SMSF trustee. Using the same company as both SMSF trustee and bare trustee is a structural flaw that can invalidate the LRBA. Set up a dedicated bare trust company (special purpose company) specifically for the property acquisition. Cost: $800–$1,500 — a small price to get the structure right.

Not Having the Bare Trust Deed in Place Before Settlement

The bare trust deed must be executed before or on the settlement date. Creating it retrospectively — after the property has already settled — creates compliance questions about when the LRBA structure was actually established. A rushed or missing bare trust deed is one of the most common errors in SMSF property transactions handled by non-specialist conveyancers.

Related Party Loan Without Safe Harbour Compliance

Setting up a related party LRBA with an interest rate below the ATO safe harbour rate — even by a fraction — exposes all rental income and gains to Non-Arm's Length Income (NALI) tax at 45%. This is an easy mistake to make if rates change after the loan is established. Review related party loan interest rates annually against the ATO's current published rates and amend if needed.

Paying Property Expenses from Personal Funds

All property expenses must be paid from the SMSF bank account, not personal accounts. Paying a rates bill or insurance premium personally and "sorting it out later" is a prohibited transaction if not promptly reimbursed with proper documentation. Set up automatic payments from the SMSF account for recurring property expenses to avoid this.