LRBA Explained: How SMSF Property Borrowing Works

What is a limited recourse borrowing arrangement?

A limited recourse borrowing arrangement (LRBA) is the primary legal mechanism that allows an SMSF to borrow money to acquire a single acquirable asset. It is governed by Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which creates an exception to the general prohibition on superannuation fund borrowing under s67.

The term “limited recourse” means the lender’s rights are restricted to the asset being acquired. If the SMSF defaults, the lender can seize the property held in the bare trust but cannot pursue other assets within the fund. This protects existing member balances from being used to satisfy the debt.

“Limited recourse” protects the fund’s other assets from the lender’s claim — but it does not protect the fund from the consequences of losing the property itself.

The property must be a “single acquirable asset” as defined by the SIS Act. It cannot be improved or fundamentally altered while held in the bare trust. This restriction has significant implications for renovation strategies.

How an LRBA is structured

An LRBA involves three parties and a specific holding structure mandated by s67A of the SIS Act:

1. The SMSF trustee — enters the loan agreement and directs the investment. The trustee has beneficial ownership but not legal title while the loan is outstanding.
2. The lender— provides the loan funds. This may be a bank, non-bank lender, or in some cases a related party (subject to arm’s length requirements).
3. The bare trust (holding trust)— a separate trust that holds legal title to the property on behalf of the SMSF. The bare trustee’s only role is to hold the asset.

While the loan is outstanding, the property sits in the bare trust. The SMSF trustee makes loan repayments and collects rental income (if any). Once the loan is fully repaid, the bare trustee transfers legal title to the SMSF trustee, and the bare trust is wound up.

The bare trust exists solely to satisfy the SIS Act requirement. It holds legal title but has no discretion — it acts only on the SMSF trustee’s direction.

Current SMSF lending rates

Since the exit of the big four banks from SMSF lending, borrowers rely on non-bank lenders. The table below shows indicative rates as of early 2026. These are factual market observations, not endorsements of any lender.

Rates are indicative only, sourced from publicly available lender rate cards as of March 2026. Actual rates depend on LVR, loan size, property type, and borrower circumstances. Rates change frequently.

Most non-bank SMSF lenders offer LVRs between 60% and 80% for residential property. Commercial property LVRs are typically lower, around 60-70%. Loan terms generally range from 15 to 30 years with principal and interest repayments required.

The ATO safe harbour rate

When an SMSF borrows from a related party (for example, a member or a related company), the ATO requires the loan to be on arm’s length terms. To simplify compliance, the ATO publishes a safe harbour interest rate each income year.

For the 2025-26 income year, the ATO safe harbour rate for real property LRBAs is 8.85% per annum. This is published in PCG 2016/5.

The safe harbour rate applies specifically to related-party LRBAs. If the SMSF borrows from a commercial lender at market rates, the safe harbour rate is not directly relevant — the commercial terms themselves satisfy the arm’s length requirement.

If a related-party loan charges interest below the safe harbour rate without meeting the alternative arm’s length criteria in PCG 2016/5, the ATO may treat the income from that arrangement as non-arm’s length income (NALI). NALI is taxed at the top marginal rate (currently 45%) rather than the concessional superannuation rate of 15%.

The safe harbour rate is reviewed annually and is typically higher than commercial SMSF lending rates, reflecting the ATO’s expectation of a risk premium on related-party loans.

Risks of LRBA borrowing

Borrowing within an SMSF amplifies both returns and risks. The following risks are well-documented in ATO and ASIC guidance:

• Concentration risk. A single property may represent 50-80% of total fund assets after an LRBA purchase, reducing diversification across asset classes.
• Liquidity pressure. Loan repayments, insurance, maintenance, and land tax create ongoing cash demands. If rental income falls short, the fund must use other assets or member contributions to cover the gap.
• Interest rate rises. A 2-3% rate increase on a $400,000 loan adds $8,000-$12,000 per year in interest costs. Stress testing at higher rates is prudent.
• Vacancy and tenant risk. Extended vacancies create direct cash flow pressure while loan repayments continue regardless of occupancy.
• Inability to improve the property. Under SIS Act s67A, the property cannot be fundamentally altered while held in the bare trust. This prevents value-adding renovations during the loan period.
• Forced sale risk. If the fund cannot meet repayments and other obligations (such as pension payments to retired members), the trustee may need to sell the property, potentially at an unfavourable time.

ASIC Report 575 (2018) found that SMSF members with balances below $500,000 generally had lower returns than equivalent APRA-regulated funds, with property concentration being a contributing factor.

LRBA vs buying without borrowing

Both approaches have trade-offs. The table below summarises key differences — neither approach is inherently superior.

The bare trust explained

A bare trust (sometimes called a holding trust or custodian trust) is a trust where the trustee holds legal title to an asset but has no active duties beyond holding and transferring the asset as directed.

Under an LRBA, the bare trust is a mandatory structural requirement. Section 67A of the SIS Act requires the acquired asset to be held on trust so that the SMSF trustee acquires beneficial ownership while the bare trustee holds legal title. This structure is what makes the loan “limited recourse” — the lender’s security interest is limited to the asset in the bare trust.

The bare trustee is typically a special-purpose company established solely for this role. It cannot be the same entity as the SMSF trustee. The bare trust requires its own trust deed, which must be properly executed before settlement.

Once the LRBA loan is fully repaid, the bare trustee transfers legal title of the property to the SMSF trustee. At this point, the bare trust is wound up and the SMSF holds the property directly. The property is then treated as any other SMSF asset — it can be renovated, improved, or dealt with at the trustee’s discretion (subject to the fund’s investment strategy and sole purpose test under s62 of the SIS Act).

A bare trust is not optional in an LRBA — it is a structural requirement under s67A. Without a properly constituted bare trust, the borrowing arrangement may breach the SIS Act.