Up until recently SMSFs were not able to lend money for purchasing certain investments like shares or property. However, with the changes in superannuation laws since 2007, it is now possible for an SMSF to borrow money in order to fund property investments, provided that they follow a strict set of rules.

The arrangement which regulates SMSF lending is commonly referred to as the limited recourse borrowing arrangement. So if the super fund has enough funds to place a deposit, the remaining funds of the total purchase price can now be borrowed. There are two ways you can borrow money, either from a certain financial institution such as a bank or a credit union or from the members of the super fund themselves.

It is important to note that the loans have non-recourse borrowing arrangements. What this means is that the lender doesn’t have the right of recourse to other assets within the SMSF, which is why the lender (the bank) asks the members of the super for a guarantee.

However, if the super fund pays a greater deposit on the investment property, the bank may disregard the requirement for security from the SMSF trustees and the property itself will be security for the loan. In the case of failure to make a payment, the lender has no right to recourse any other assets within the SMSF except the property.

In general, if the bank provides 80% of the residential property’s value it will ask the trustees for a guarantee. Normally the bank won’t ask for a guarantee when the loan is 60% percent of the value of the property. In order to determine whether there is a need for a guarantee, the bank may consider the condition of the property the borrower’s credit history, and the income expected from rental.

The SMSF has an entitlement to the investment property as a beneficiary, but the bare trust is the owner. The SMSF has the right to acquire the legal ownership of the property after the loan has been repaid.

The members of the SMSF are forbidden to sell their own houses to the super fund. Also, the fund is not allowed to rent the property to a trustee or a family member, but a trustee can purchase the property from the super fund when it enters the pension phase.

SMSF lending for purchasing properties has many benefits such as helping the fund to diversify its investments, buying larger shareholdings, tax deduction, and so on. And as usual, all investment purchases must pass the sole purpose test.