How does borrowing in SMSF operate?

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Borrowing in SMSF to purchase an investment requires following a strict set of rules.

Due to the risk associated with geared investments, your other investments held in the SMSF need to be protected. To achieve this, geared investments are purchased using a limited recourse borrowing arrangement (LRBA) and are held in a specific holding trust until the loan is repaid.

A Limited Recourse Borrowing Arrangement (LRBA) limits the lender’s (recourse) rights of recovery against your SMSF to the asset you purchased with borrowed money. For a better understanding of how LRBA work, see the article #3 Differences in Lending Requirements in the article Borrowing within an SMSF: The 3 Major Differences to your Typical Home Mortgage.

Even though your geared investment is contained in a specific holding trust, the SMSF will have beneficial ownership (meaning your SMSF will be credited with income and capital growth) of the asset while the trust has legal ownership. Legal ownership can be transferred to the SMSF once the asset is fully repaid.

 

smsf borrowing structure

The fact that this type of arrangement needs to be in place has two very important implications.

  1. The amount of paperwork required to setup a loan significantly increases
  2.  To minimise their exposure to excessive risk banks and lenders are far more stringent in following due diligence procedures.

This makes the typical SMSF loan more difficult to setup compared to a standard mortgage and this should be accounted for when considering a property in super. A qualified financial planner can assist with the establishment of the trust structures.

For a more detailed discussion about property investing using your Superannuation funds, register for a Free SMSF Consult.

This article is an excerpt from The Beginners Guide to Successful Property Investing Using Superannuation Funds, you can download the ebook version here.

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