It is the only lawful way a self managed super fund can borrow to buy property, and the structure is stranger than most trustees expect.
A limited recourse borrowing arrangement explained for trustees works like this. The SMSF borrows and pays the deposit.
A limited recourse borrowing arrangement explained plainly: your fund borrows, but a separate trust holds the title, and the lender can only ever pursue that one property if things go wrong.
A limited recourse borrowing arrangement explained for trustees works like this. The SMSF borrows and pays the deposit. A bare trust holds legal title to the property. The fund receives all rent and makes all repayments. On repayment, title transfers to the fund.
The limited recourse feature is the reason this structure exists at all. Without it, one bad property could put every other asset in a member's retirement savings at risk.
The bare trustee has no discretion. It exists purely to hold title, which is what distinguishes a bare trust from an ordinary discretionary trust.
This is the part of any limited recourse borrowing arrangement explained badly by most guides.
Superannuation law generally prohibits a fund from granting a charge over its assets. The bare trust smsf property structure sidesteps that by keeping the property outside the fund’s direct ownership until the debt is discharged.
A limited recourse borrowing arrangement explained as a sequence is easier to follow, and the sequence is not negotiable.
Getting the lrba structure smsf lenders require wrong at step three is the most expensive error available. Contracts signed in the fund’s own name generally cannot be corrected without unwinding the purchase.
One arrangement, one asset. Any limited recourse borrowing arrangement explained properly starts here, because it limits what you can buy.
The distinction between repairing and improving is far stricter here than for an ordinary investment property. Take advice before undertaking work.
Beyond the legal structure, a limited recourse borrowing arrangement explained by a lender comes with its own conditions.
The smsf lrba requirements that vary most between lenders are liquidity and contribution multiples, not the loan to value ratio.
This is the feature a limited recourse borrowing arrangement explained badly always skips, and the one it is named for.
If the loan defaults, the lender takes the property held in the bare trust and has no claim on the fund’s shares, cash, term deposits or other property. Members’ broader retirement savings sit outside the lender’s reach entirely.
Read the guarantee carefully. Limited recourse protects the fund. It does not necessarily protect you.
Establishing a limited recourse borrowing arrangement explained above is more involved than a standard purchase.
Each of these mistakes can invalidate a limited recourse borrowing arrangement entirely.
Four checks before any contract is signed under a limited recourse borrowing arrangement.
It is the only structure through which a self managed super fund may borrow to buy property. The fund borrows, a separate bare trust holds legal title, and the lender’s security is limited to that single property alone.
Superannuation law generally prohibits a fund from granting a charge over its own assets. The bare trust holds legal title outside the fund until the loan is repaid, which allows the lender to take security lawfully.
If the loan defaults, the lender can take the property held under the arrangement and cannot pursue the fund’s shares, cash or other property. Note that personal guarantees from members sit outside the fund and remain enforceable.
The arrangement must cover a single acquirable asset, the fund must hold beneficial ownership, the lender’s recourse must be limited to that asset, and the investment must satisfy the sole purpose test. Improvements that change the asset’s character are not permitted while borrowed.
Before contracts are exchanged. The purchase contract is signed in the bare trustee’s name. Establishing the trust afterwards, or signing in the fund’s name, can trigger duty a second time or require unwinding the purchase.
Repairs and maintenance are permitted. Improvements that change the character of the asset are not, while the borrowing remains in place. The distinction is stricter than for ordinary investment property, so take advice first.
No. Each arrangement covers a single acquirable asset. Two adjoining lots on separate titles generally require two separate arrangements, each with its own bare trust and loan.
Legal title transfers from the bare trust to the fund, and the bare trust is then typically wound up. The property is thereafter held directly by the SMSF like any other fund asset.
A limited recourse borrowing arrangement explained on paper looks simple. Executing one in the right order, with a deed your lender accepts, is where it usually goes wrong.
This guide was reviewed by Paritosh Wadhwani, Director and principal broker at APW Finance Pty Ltd, Bella Vista NSW. Paritosh structures residential, commercial, SMSF and self-employed lending across Sydney. For business premises purchases see commercial property loans Sydney.
APW Finance Pty Ltd delivers expert lending solutions with personalised service, empowering clients across residential, commercial, and business sectors.