Borrowing: the LRBA demystified

Limited Recourse Borrowing Arrangements sound terrifying. They’re not. Here’s exactly how they work, and exactly what the 2026 ban changed.

We’re now in Part 3 of this book: the How.

You’ve decided SMSF property might be worth doing (Tick 1). You’ve confirmed the rules allow it and the numbers work (Tick 2). Now it’s time to actually execute.

And for many SMSF property purchases, that means borrowing, through something called a Limited Recourse Borrowing Arrangement. LRBA for short.

But before we get to how an LRBA works, you need the biggest rule change in this book, because it decides whether this chapter applies to your purchase at all.

What changed on 10 August 2026

In June 2026, the government struck a deal with the Greens to pass its broader tax package, and the price was SMSF borrowing. The amendment adds one condition to section 67A of the superannuation law: from commencement, an LRBA over real property is only permitted if the property is business real property. Royal Assent came on 26 June 2026, and the ban commenced 45 days later, on 10 August 2026.

In plain English: your SMSF can no longer take out a new loan to buy a house, a unit, a townhouse or any other residential property. Whether it’s brand new or established makes no difference. Residential doesn’t meet the business real property test, so it can’t be financed.

Four groups of people, four different outcomes.

If you already had a residential LRBA before commencement, nothing changes. Your arrangement is fully grandfathered, and refinancing it is explicitly allowed.

If you exchanged contracts before 10 August 2026, you were protected, even if settlement happened afterwards. The test was the contract date, not the settlement date.

If you want to buy residential property with the fund’s own cash, no borrowing involved, you still can. The ban targets borrowing, not residential ownership.

If you want to borrow for a new purchase, the property must be business real property: used wholly and exclusively in one or more businesses. Commercial premises qualify. Your own business premises qualify, which keeps the most powerful SMSF strategy alive. A residential property with a home office does not qualify, and mixed-use property or vacant land needs careful professional review before you assume anything.

Why did it happen? SMSFs are less than one per cent of residential property borrowing, and the measure raises about $50 million over four years, so the housing impact is close to nil. The honest answer is politics: a decade-old recommendation from the 2014 Murray inquiry, finally traded for Senate votes. It doesn’t matter much why. It’s law, and this book treats it as the ground you’re standing on.

One practical warning. When a similar ban was floated in 2019, lenders pulled their SMSF residential products before any law passed. Expect the remaining market, including refinance products for grandfathered loans, to keep shrinking. If you hold a grandfathered loan, don’t assume today’s refinancing options will exist in five years.

Everything from here describes how an LRBA works when you can use one: for business real property, or for a grandfathered arrangement you already hold.

The name sounds intimidating. The structure can seem confusing. But once you understand how it works, it’s actually quite elegant.

Let’s demystify it.

The airbag loan

Here’s how I think about LRBAs.

Imagine you’re buying a car with a loan. If you crash the car and can’t make the repayments, the finance company takes the car. That’s standard.

But what if the finance company could also take your house, your savings, your other investments? What if one bad car loan could wipe out everything you own?

That would be terrifying. Nobody would take car loans.

Fortunately, car loans don’t work that way. The car is security for the loan. If things go wrong, the lender takes the car. Your other assets are protected.

An LRBA is the same concept applied to SMSF property.

When your SMSF borrows to buy property, the loan is “limited recourse”. That means if things go wrong, the lender can only take the property that was purchased with the loan. They can’t touch the rest of your super fund’s assets.

It’s like an airbag for your super. If there’s a crash, the damage is contained to one area. The rest survives.

This protection is built into the law. It’s not optional. Every SMSF property loan must be limited recourse. That’s what makes it an LRBA.

How the structure works

Here’s where it gets a bit technical. Bear with me.

When your SMSF borrows to buy property, the property can’t be held directly by the SMSF until the loan is paid off. Instead, it must be held by a separate entity called a “bare trust” or “holding trust”.

Think of it like this:

The SMSF is the real owner. It makes the decisions, receives the rent, pays the expenses, and will eventually hold the property directly.

The bare trust is the legal owner. It holds the title to the property on behalf of the SMSF. It has no real power. It just holds the asset.

The holding trustee is the person or company that acts as trustee of the bare trust. This is usually a special-purpose company set up just for this purpose.

Why this complicated structure?

Remember, the loan is limited recourse. The lender can only take the property if things go wrong. But if the property was held directly by the SMSF, taking it back would be messy. The lender would be trying to grab assets from inside your super fund.

By holding the property in a separate bare trust, the lender’s security is cleaner. If you default, they take the property from the bare trust. Your SMSF loses that asset, but the rest of the fund is untouched.

Once the loan is fully paid off, the bare trust transfers the property to the SMSF. The holding trustee has done its job and can be wound up.

What the lenders require

SMSF loans are different from regular home loans. The requirements are stricter and the rates are higher.

Here’s what to expect.

Deposit: 30% to 35%, sometimes higher. Most SMSF lenders want a significant deposit for business real property. (Before the 2026 ban, residential LRBAs typically ran at 20% to 30%; that part of the market now exists only to refinance grandfathered loans.) Gone are the days of 10% deposits.

Interest rates: Higher than standard. SMSF loan rates are typically 0.5% to 1.5% higher than equivalent standard home loan rates. This reflects the additional complexity and risk for the lender.

Loan term: Usually up to 25 years. Some lenders offer 30 years, but 25 is more common. Remember, the loan needs to be paid off before you’re drawing a pension, or at least manageable in pension phase.

Personal guarantees: Sometimes required. Even though the loan is “limited recourse” against the SMSF’s other assets, lenders often require members to provide personal guarantees. This means you could be personally liable if things go wrong. Read the fine print.

Minimum super balance: Varies. Some lenders won’t touch SMSFs below a certain balance. $200,000 is a common minimum, though some want more.

Cash buffer: Often required. Lenders often want to see that your SMSF has cash reserves beyond the deposit. This provides a buffer for vacancies, maintenance, and unexpected costs.

Who lends to SMSFs

The SMSF lending market has changed a lot over the years.

The big four banks (CBA, Westpac, ANZ, NAB) have all exited SMSF lending at various times. Some have come back in limited form, others haven’t. Don’t assume your regular bank will lend to your SMSF.

The main lenders in this space are:

• Specialist SMSF lenders (like Liberty, Pepper, La Trobe)

• Smaller banks and credit unions

• Some larger banks with SMSF products (check current availability)

• Private lenders (usually at higher rates)

The market shifts constantly. A lender that was competitive last year might have exited the market this year. A lender that didn’t do SMSF loans might have started. The 2026 ban accelerated all of this: residential SMSF products are being withdrawn or repriced, and the lenders that remain are concentrating on business real property. Treat any list of lenders, including the one above, as a snapshot that ages quickly.

This is where a good mortgage broker earns their fee. A broker with SMSF experience will know which lenders are active, what their current criteria are, and who’s likely to approve your situation.

Don’t try to navigate this market yourself. The landscape is too fragmented and fast-moving.

The restrictions on LRBA property

Once you buy a property with an LRBA, there are restrictions on what you can do with it until the loan is paid off.

No improvements that change the character of the property. You can do maintenance and repairs. You can replace like with like (new carpet, new hot water system, repaint). But you can’t add a granny flat, knock down walls, or do major renovations that fundamentally change the property.

Why? Because the lender’s security is the property as it was when they lent the money. If you dramatically change it, the security changes too. The rules keep things simple.

No substitution. You can’t sell the property and use the proceeds to buy a different property while keeping the loan. If you sell, you pay out the loan.

One property per loan. Each LRBA must be for a single property. You can’t bundle multiple properties into one loan.

These restrictions can be frustrating if you want to add value through renovation. But they’re the trade-off for being able to borrow inside super in the first place.

If you want to do major improvements, you can either wait until the loan is paid off, or make sure you buy a property that doesn’t need significant work.

Raj’s borrowing journey

Raj found the perfect office building for his business. Listed at $700,000. Now he needed to work out the borrowing.

His mortgage broker, who specialised in SMSF lending, came back with options from three lenders.

Lender A: 65% LVR maximum (35% deposit required), 7.2% interest rate, $2,000 application fee, personal guarantee required.

Lender B: 70% LVR maximum (30% deposit required), 7.5% interest rate, $1,500 application fee, personal guarantee required.

Lender C: 70% LVR maximum, 7.8% interest rate, no application fee, no personal guarantee.

Raj had to make a choice.

Lender A had the best rate, but required a bigger deposit. On a $700,000 property, 35% was $245,000. Raj’s SMSF had $650,000, so after the deposit he’d have $405,000 left in the fund. Comfortable.

Lender B and C both allowed 30% deposits ($210,000), leaving more cash in the fund. But Lender B required a personal guarantee, meaning Raj’s personal assets would be on the line if things went wrong.

Lender C had no personal guarantee, but the highest rate.

Raj ran the numbers. The difference between 7.2% and 7.8% on a $455,000 loan was about $2,700 per year. Over the life of the loan, that adds up. But he valued the protection of no personal guarantee.

He also factored in the larger cash buffer that came with the smaller deposit. Having $440,000 left in the fund (after Lender C’s 30% deposit) instead of $405,000 (after Lender A’s 35% deposit) meant more runway if his business hit a rough patch.

In the end, Raj went with Lender C. Higher rate, but more protection and more buffer. The right choice for his risk tolerance.

There’s no universally correct answer. It depends on your priorities.

A note on short-term rentals

Some people want to use their SMSF property for short-term rentals like Airbnb or Stayz. This is allowed, but there are things to consider.

The sole purpose test still applies. You cannot stay in the property yourself. Not even one night. Not even if you pay “market rate”. It must be rented to unrelated parties only.

Lenders may have restrictions. Some SMSF lenders don’t like short-term rental properties. They prefer traditional long-term tenants. Check with your lender before assuming you can Airbnb the property.

Income can be volatile. Short-term rentals can generate higher yields in good times, but income is less predictable than a standard lease. Make sure your SMSF can handle the ups and downs.

More management required. Short-term rentals need more active management: bookings, cleaning, guest communication, supplies. Either you do it (using your time) or you pay someone (eating into yield).

Short-term rental can work in an SMSF context. But don’t assume it’s automatically better than traditional rental. Run the numbers, including realistic vacancy rates and management costs.

Interest-only or principal and interest?

Most SMSF loans offer both interest-only and principal-and-interest options.

Interest-only: You pay only the interest each month. The loan balance doesn’t reduce. Your repayments are lower, but you’re not building equity.

Principal and interest: You pay interest plus a portion of the loan balance each month. Higher repayments, but the loan gets smaller over time.

Which is better?

Interest-only can make sense if your SMSF’s cash flow is tight. Lower repayments mean more buffer. You can always make extra repayments if the fund has surplus cash.

Principal and interest makes sense if you want to pay off the loan faster and build equity. Remember, once the loan is gone, the LRBA restrictions lift and you have more flexibility.

Some people start interest-only while they build up the fund’s cash reserves, then switch to principal and interest later. There’s no single right answer.

One warning: don’t stay on interest-only forever thinking you’ll pay it off “later”. Later has a habit of never arriving. Have a plan.

Planning for loan exit

Here’s something people forget to think about: how does the loan end?

An LRBA needs to be paid off at some point. The most common exit strategies are:

Pay it off from contributions and rental income. The fund makes regular contributions, receives rental income, and uses both to pay down the loan over time. This is the standard path.

Sell the property. If you sell the property, the loan is repaid from the sale proceeds. Any surplus stays in the fund.

Refinance. You might refinance to a different lender with better terms. The old loan is paid out and a new one takes its place.

Pay out from other super assets. If you have other assets in the fund (shares, cash), you could potentially sell those to pay off the property loan.

The key is to have a realistic plan. Don’t assume contributions will always increase or that the property will always be tenanted. Stress test your exit strategy the same way you stress tested your entry.

The LRBA in summary

Let me bring this all together.

An LRBA lets your SMSF borrow to buy property, and from 10 August 2026 that means business real property for any new loan. The residential door is closed for new arrangements, grandfathered for existing ones. The loan is “limited recourse”, meaning the lender can only take the property if things go wrong, not your other super assets. The property is held in a bare trust until the loan is paid off.

SMSF loans have stricter requirements and higher rates than standard home loans. You’ll need a 30% to 35% deposit, and you might need to provide a personal guarantee.

While the loan is in place, you can’t do major renovations or substitute the property. Once the loan is paid off, those restrictions lift.

The structure sounds complicated, but it’s designed to protect you. The limited recourse feature is actually a benefit, not a burden.

Work with professionals who know SMSF lending: a specialist mortgage broker, your SMSF accountant, and a solicitor experienced in bare trust structures.

Get it right, and borrowing can help you buy a property your SMSF couldn’t otherwise afford. Get it wrong, and you might find yourself in a structure that doesn’t work for your situation.

Find your sweet spot, or have the guts to walk away.