Self-Managed Super Funds (SMSFs) offer Australians the opportunity to have more control over their retirement savings, one of which is the ability to invest in property. However, the regulations are complicated if you want to take out a loan. It is very important for trustees who want to be informed and follow the rules issued by the ATO to know the difference between a residential and commercial Self-Managed Super Fund loan.
We at Rovo Finance are dedicated to making the borrowing process easier for SMSF trustees and helping them compare loan options for residential and commercial property investments.
Introduction to SMSF Borrowing
Self-managed super funds (SMSFs) can take on debt to buy real estate via a scheme known as a Limited Recourse Borrowing Arrangement (LRBA). This is a safety measure which stipulates that in the event of a default, the bank or lender can only have recourse to the asset purchased, i.e. the property, but not the whole fund.
It is quite a controlled and restrictive way of borrowing via an SMSF, hence the trustees are required to ensure that they keep within the rules of the superannuation legislation.
What Is an SMSF Loan?
An SMSF loan is a specialised facility that allows a super fund to borrow for property investment. These loans differ from standard mortgages because they must comply with LRBA rules and ATO restrictions. SMSF loans can be used to purchase either residential property or commercial property, but each comes with unique conditions.
Residential SMSF Loans Explained
Residential SMSF loans allow trustees to purchase investment properties such as houses, apartments, or townhouses. Key points include:
- Purpose: Strictly for investment—members cannot live in or lease the property to related parties.
- Loan-to-Value Ratio (LVR): Typically capped at 70–80%.
- Interest Rates: Higher than standard home loans due to added risk and compliance requirements.
- Restrictions: Renovations funded by borrowings are limited; improvements must not fundamentally change the property.
- Rental Income: Must be at arm’s length, with tenants paying market rates.
Commercial SMSF Loans Explained
Commercial SMSF loans allow trustees to purchase offices, warehouses, retail spaces, or industrial properties. Key points include:
- Purpose: Investment, but with more flexibility—SMSFs can lease commercial property to related parties if rent is at market value.
- Loan-to-Value Ratio (LVR): Often higher than residential, with some lenders offering up to 75–80%.
- Interest Rates: Generally competitive, sometimes lower than residential SMSF loans.
- Restrictions: Must comply with LRBA rules, but renovations and improvements may be more flexible.
- Rental Income: Can be paid by a member’s business, provided it is at arm’s length.
Pros & Cons of Each Loan Type
Residential SMSF Loans
Pros
- Exposure to residential property market growth
- Potential for stable rental income
- Diversification of SMSF portfolio
Cons
- Higher interest rates
- Strict restrictions on tenant use
- Limited renovation flexibility
Commercial SMSF Loans
Pros
- Ability to lease to related parties (e.g., member’s business)
- Often lower interest rates
- Greater flexibility for improvements
Cons
- Higher risk if business tenants default
- Market cycles can impact rental demand
- Larger upfront costs for commercial property
Important Compliance Requirements
SMSF trustees must ensure:
- Borrowing complies with LRBA rules
- Property investment aligns with the fund’s investment strategy
- Rental arrangements are at arm’s length
- No personal use of residential property
- Documentation and trust deeds are up to date
Failure to comply can result in severe penalties from the ATO.
How Rovo Finance Helps with SMSF Lending?
Navigating Self Managed Super Fund loans can be complex. At Rovo, we simplify the process by:
- Comparing residential and commercial SMSF loan options across multiple lenders
- Negotiating competitive interest rates and terms
- Guiding trustees through compliance requirements
- Structuring loans to align with fund strategies
- Providing ongoing support from application to settlement
Contact Rovo Finance:
Jitendra – Mortgage Broker
Mobile: 0494 394 747
Email: jitendra@rovofinance.com.au
FAQs
No. Residential SMSF properties cannot be occupied by members or related parties.
Yes, provided rent is at market value and the arrangement is at arm’s length.
Typically 20–30% of the property value, depending on lender policies.
Yes, due to compliance complexity and risk. Commercial SMSF loans may be slightly lower.
Only limited repairs and maintenance are allowed. Major improvements must be funded from SMSF cash reserves.
Usually 6–8 weeks, depending on documentation and lender requirements.
It depends on your fund’s strategy, risk appetite, and long term goals.
