Borrowing within a Self-Managed Super Fund (SMSF) to purchase property has been a popular wealth creation strategy for more than 15 years, with an estimated $44 billion worth of both residential and commercial property sitting in SMSFs that has been acquired using a Limited Recourse Borrowing Arrangement.

A brief history

In their 2019 Federal election campaign, one of the Labor party’s policies was to ban the ability to use Limited Recourse Borrowing Arrangements (LRBAs) within SMSFs.

Although ultimately unsuccessful at that election, with the Albanese Labor government due to hand down their new budget on October 25, the belief within the financial advice sector is that they will look to abolish LRBAs. The proposed policy shouldn’t impact pre-existing LRBA arrangements, nor any new deals that occur pre-Federal budget change.

The four major banks have stopped offering this product over the last few years which impacted pre-existing loans held under these agreements, with rates rising rapidly in a push to get these loans out of their portfolios. However, this move has opened the door to various specialist lenders making the market very competitive from a pricing standpoint. We have seen rates increase to as much as 7.5% on a LRBA held within a big 4 bank, compared to 5.29% offered by a lender specialising in these arrangements.

What are the requirements?

Within the residential property space there are certain requirements for a property purchase using an LRBA - lenders will use the property being purchased as security however the property has to be held within a Bare trust that holds the property on trust for the smsf until there is no debt on the property; on some occasions they can do an off-the-plan purchase; there cannot be multiple dwellings on the title; they will not lend for vacant land; and they run on a case-by-case basis for rural lending. The servicing for residential LRBAs includes 80% of gross rental repayments, 100% of contributions and 100% of any additional voluntary contributions post tax. The amount the lender will allow to be borrowed is a maximum of up to 80% which is the loan-to-value ratio (LVR). From a commercial standpoint the LVRs can differ based on the property’s location. Most of the specialist lenders will allow for an LVR of up to 80% for a commercial property with some sitting at a maximum of 75%. The serviceability is very similar for both commercial and residential where the lenders use 80% of the gross rental/lease agreements for the commercial property.

What are the benefits?

The ability to house not only residential properties but also commercial properties within your SMSF using the LRBA gives investors the chance to diversify their portfolios. Having an LRBA in place can help protect the other assets within the SMSF from recourse or from the lender selling off those assets to recoup any additional losses in the event of a default. When holding a property for a period greater than 12 months the amount of capital gains that can be applied will drop from 15% to 10%. 

Superannuation income is taxed at 15%, and at a rate as low as 0% when special conditions are met in retirement age. The concessional tax rates apply to both the rental income as well as any capital gains resulting from the sale of the property.

If you’re currently renting business premises, using superannuation to purchase those premises could mean paying off your own asset as opposed to paying off someone else’s investment. Holding business premises within an SMSF can also provide asset protection against any future claims or liabilities that could result from operating the business. If the property is held in an SMSF, you can guarantee and secure the businesses tenancy for the longer term.

Through a turn-key solution, Partners Wealth Group has provided advice on more than 1500 LRBA transactions since 2007. With legal advice, financial advice and lending all under one roof, we can help facilitate a lending strategy for you.

It is important to discuss this strategy with your advisor and broker to determine how best to safeguard your assets moving forward.

Click here to watch our Limited Recourse Borrowing Arrangements in SMSF webinar.