Get the Finder app 🥳

Track your credit score, free

Free

What is a limited recourse borrowing arrangement?

Find out how a limited recourse borrowing arrangement lets you use property to fund your retirement.

Updated

Fact checked

If you’ve chosen a self-managed super fund (SMSF), odds are you’ve heard the term “limited recourse borrowing arrangement”. These arrangements are often used to source loans through an SMSF. However, what is a limited recourse borrowing arrangement, and should you seek one out?

What is a limited recourse borrowing arrangement?

A limited recourse borrowing arrangement, or LRBA, is a loan sourced by an SMSF trustee. The SMSF trustee uses these funds to purchase a single asset to invest in to be held in a separate trust. Returns on the investment go back to the SMSF trustee.

An LRBA is “limited recourse” because of the different way defaults are treated. Traditional or full recourse loans mean that the lender can go after a borrower’s personal assets in the case of default.

For instance, if you default on a home loan, your lender can foreclose on and sell your house to recover the debt. In the event that the sale of your house doesn’t cover the outstanding debt, you will still be obligated to pay the shortfall.

By contrast, in an LRBA the lender’s rights are limited to reclaiming the asset that the loan funds originally purchased, which is held in separate trust. The lender has no recourse to any other assets held in the SMSF.

How does an LRBA relate to self-managed super funds?

Limited recourse borrowing arrangements are used by SMSFs to take out loans to purchase assets. The assets purchased by LRBAs are typically residential or commercial property.

In order to invest in property, most SMSFs will require a home loan. Home loans to SMSFs are set up as limited recourse borrowing arrangements.

The benefit of a limited recourse borrowing arrangement is that the other assets in your SMSF will be protected. If your SMSF defaults on its property loan, the lender will be able to foreclose on the property, but will not be able to touch any of the other assets in your SMSF.

Should I invest in property through my SMSF?

Property investment is an increasingly popular strategy for SMSFs. In September 2013, limited recourse borrowing arrangements accounted for $9.167 billion in SMSF fund allocation. By September 2017, this figure had skyrocketed to $30.73 billion.

Assets invested in LRBAs (Billions)

Source: Australian Taxation Office

The primary benefit of investing in property through your SMSF is that it helps diversify your portfolio. There are also tax benefits to owning property through an SMSF. For instance, super funds are taxed at 15%, which is a lower rate than personal tax rates.

Also, there are capital gains tax concessions for property investment through SMSFs. If the property is sold during the SMSF’s accumulation phase, CGT is discounted. If it’s sold during the SMSF’s pension phase, it’s exempt from CGT.

If you’re a business owner and use your SMSF to buy a commercial property, you can use the property as your business premises. However, you must lease the property at commercially competitive rates.

Before investing, however, you should weigh up the potential risks versus the benefits. Property investment can be lucrative, but like any investment, there’s no guarantee of return.

Also, setting up an SMSF trust to buy property can be a costly exercise. You’ll need to ensure that the fees and charges associated with setting up your LRBA don’t outweigh its potential benefits.

Finally, SMSF home loans usually carry higher interest rates than traditional home loans. You’ll need to make sure your SMSF can afford to make loan repayments and can continue to do so should rates rise.

How do I use an LRBA to buy property through my SMSF?

Buying property through an SMSF requires a fairly complex structure and you’ll likely need an accountant or financial planner to set it up for you. However, once this structure is set up, you'll apply for a limited recourse SMSF home loan much like you would apply for any other home loan.

First, your accountant will set up what’s known as a bare trust. This is a trust separate to the other assets of the SMSF.

Next, you will decide on a trustee to act as custodian for the property. Some lenders require the trustee to be a company.

Next you will apply for an SMSF home loan. Your trustee will pay the deposit on the property you’ve selected on your behalf, and will put the property up as security for the SMSF home loan. You will be required to cover any stamp duty costs and legal expenses through your SMSF.

After your SMSF loan settles, you will make repayments on the loan and cover any expenses related to maintaining the property.

While the application process for an SMSF home loan may be similar to standard home loans, you will require some specific documents. These can sometimes take a bit of time to source, which means approval times for SMSF home loans can be longer than for traditional home loans.

Some of the documents you’ll require are:

  • SMSF establishment deed or deed update. This is the document establishing your self-managed super fund. If the original deed did not allow borrowing through your SMSF, you’ll need an updated deed showing that your SMSF is allowed to borrow, to appoint custodians and to invest in property.
  • Trustee for SMSF. Some lenders require that the trustee of your SMSF is a company.
  • Evidence of bare trust. Your SMSF will need to establish a bare trust in which to hold the property, and your lender will need all the documents showing the establishment of this bare trust.
  • Bare trust trustee. Some lenders require that the trustee or custodian for the bare trust must be a company.
  • SMSF investment strategy. You’ll need to provide documents showing your SMSF’s investment strategy, and that property investment forms part of this strategy.
  • Limited Statement of Advice. Some lenders may ask for a Limited Statement of Advice, which is a document outlining the recommendations made by a financial adviser pertaining to your SMSF.

To learn in detail about buying a property through an SMSF, check out our guide.

Investing in property through your SMSF can be a savvy diversification strategy. If your SMSF doesn’t have the cash on hand to buy a property outright, a limited recourse borrowing arrangement through an SMSF home loan could be the answer.

Data indicated here is updated regularly
$
Loan purpose
Offset account
Loan type
Repayment type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
Liberty Financial SMSF
5.20%
5.63%
From $495
$30 monthly ($360 p.a.)
75%
A self-managed super fund loan from Liberty Financial. Available with a 20% deposit.
Freedom Lend Variable SMSF - LVR 70% (IO)
5.49%
5.64%
$1,645
$395 p.a.
70%
A flexible SMSF home loan with interest-only repayments. 100% offset account attached.
Freedom Lend Variable SMSF - LVR 65% (IO)
5.29%
5.44%
$1,645
$395 p.a.
65%
Interest-only SMSF home loan with flexible repayments. Includes a 100% offset account.
Freedom Lend Variable SMSF - LVR 75% (P&I)
5.29%
5.82%
$1,645
$395 p.a.
75%
A flexible SMSF home loan for investment and refinance. 100% offset account attached.
loading

Compare up to 4 providers

Aussie Home Loans Logo

Enter your details and get a free consultation with an expert broker from Aussie.

By submitting this form, you agree to the Finder Privacy and Cookies Policy and Terms of Use

Applications are subject to approval. Conditions, fees and charges apply. Please note that you need to be an Australian citizen or permanent resident to apply.

Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2020 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

By submitting this form, you agree to the Aussie privacy policy.

After entering your details a mortgage broker from Aussie will call you. They will discuss your situation and help you find a suitable loan.

  • A comparison of home loans from multiple lenders.
  • Expert guidance through the entire application process.
  • Free suburb and property reports.

Aussie Home Loans Lender Logos

The Adviser’s number 1 placed mortgage broker 8 years running (2013-2020)

Related Posts

Home Loan Offers

Important Information*
Logo for Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)
Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)

Up to $3,000 refinance cashback. A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.

Logo for St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)

Up to $4,000 refinance cashback. A competitive variable rate loan from St.George. Refinancers borrowing $250,000 or more can get up $4,000 cashback for their first application (Other terms, conditions and exclusions apply).

Logo for Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I (*now 2.59%, drops to 2.54% on 30 Sep)
Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I (*now 2.59%, drops to 2.54% on 30 Sep)

A competitive variable rate mortgage for owner occupiers $0 application and $0 ongoing fees. This interest rate falls over time as you pay off the loan. This rate will drop to 2.54% p.a on 30 September 2020 for new and existing customers. You can get this rate if you apply today.

Logo for UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate

Take advantage of a low-fee mortgage with a special interest rate of just 2.49% p.a. and a 2.49% p.a. comparison rate.

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site