Using super to buy property; how SMSF lending works

Many Australians rely on an industry or retail super fund to manage their superannuation investments, adopting a ‘set and forget’ stance to building their retirement savings pot. But by taking a different approach to securing your financial future, your retirement savings can be used to purchase property – and the key to it is a Self-Managed Super Fund (SMSF).  

The SMSF in a nutshell

A SMSF gives you control over how your retirement savings are invested instead of relying on a super fund to do it for you. Anyone considering a SMSF should work closely with a financial advisor or accountant, not only to ensure that the SMSF is compliant with tax obligations and superannuation laws, but also to help you determine an investment plan that’s most likely to lead to a lucrative outcome.  

Buying a property with your SMSF – the criteria

With investing in property considered to be one of the safest financial investments over the long-term, despite inevitable market fluctuations, your SMSF can be used to purchase an investment property provided certain criteria are met. The core principles are that the property must only be used to provide benefits to the fund members, the property can’t be purchased from a family member, and all rental income and capital gains must be reinvested into the fund – only to be accessed at retirement. 

Above all, the fund member can’t live in a property purchased by their SMSF, nor can they release equity in the same way they might for their home because it must always be set up to deliver financial gain to the fund.  

The role of a loan provider

To purchase a property using your SMSF, you’ll need to set up what is called a Limited Recourse Borrowing Arrangement (LRBA) with your loan provider. Under a LRBA, the SMSF trustee borrows funds from the lender to purchase property (commercial or residential) using a proportion of their superannuation savings as a deposit. Crucially, property purchased under a LRBA is held in a separate trust from other assets in the SMSF until the loan is repaid. The existence of the LRBA means that in the event of any loan defaults, the lender’s rights only extend as far as the property held in the trust, which means none of your other SMSF assets are put at risk. 

While seeking the advice of a financial advisor is an essential part of deciding whether a SMSF could work for you, SMSF loans – facilitated by the LRBA – could open the door to more rewarding investment options. 

Find out more about our SMSF offering here.