How Does an LRBA Work?

The complete guide to LRBA loans for SMSF trustees

Limited Recourse Borrowing Arrangements (LRBA) paves the way for super fund (SMSF) trustees to loan some funding to acquire a new property.

One main advantage of this is that you can sell the properties you’ve bought if you default on your existing mortgage. However, all remaining assets in your SMSF will stay protected.

Besides, there are a handful of lenders out there who offer SMSF loans. If you want to venture into LRBA to keep your retirement fund safe, here are some crucial facts you need to know.

What is an LRBA?

The Superannuation Industry (Supervision) Act of 1993 restricts SMSF trustees from borrowing any loan unless through a limited recourse borrowing arrangement (LRBA).

In other words, you need to set up a bare trust as a separate entity so you can legally acquire the residential or commercial property in place of the super fund.

We call this a single acquirable asset, which also covers multiple units in one title, like a commercial building and a car park that can be separately sold.

Using a bare trust with an LRBA, you can legally invest in property on behalf of your SMSF. However, you can only acquire one commercial/residential property for every bare trust.

How much can you borrow in a limited recourse loan?

• Residential Property: You can apply for a limited recourse loan to borrow around 75-80% of the residential property value you want to buy.
• Commercial Property: With an LRBA, you can loan up to 70% of a commercial property’s value.
• Discounts: Some banks and lenders can offer discounts and margins to their SMSF residential loan rates. But keep in mind that these discounted rates vary significantly.

For more information on borrowing in an LRBA for your SMSF, call our specialist mortgage brokers on 1300 052 055 today.

Are there advantages in limited recourse loans?

Absolutely! Here are some of the most common advantages of an LRBA loan:

• Expand your SMSF investments into other ventures, including assets such as commercial properties.
• Help business owners purchase a commercial space
• Protect other SMSF assets from recourse. The lender will acquire other assets to cover the losses from selling the property you bought using the loan.
• Enjoy tax benefits, including capital gains tax concessions (CGT) that you can get for as low as 10% if you’ve held the property for over a year.
• Use concessional super contributions to pay off your loan faster, given that you’re not nearing the retirement age.

What are the cons of limited recourse loans?

Before you head out and apply for an LRBA, ensure that acquiring the commercial or residential property will give you more benefits than risks, especially during your retirement.

Consider some important factors such as capital growth and rental income and whether those are worth more than the mortgage interests and maintenance/repair costs.

That said, here are some disadvantages of an LRBA:

• Investors will heavily rely on the property market
• If the property consumes a large sum of the SMSF’s assets, the risk of illiquidity increases.
• In case of a default, if the property cannot be quickly sold, it may affect the super fund’s capacity to meet its responsibility to beneficiaries.
• Superannuation policies and legislation regularly change. Hence, it can be hard to keep up with the changes and may lead to expensive fines if policies are breached.

Do I need a personal guarantee to qualify?

Most banks and lenders currently require personal guarantees to protect SMSF members if they have trouble meeting some terms and conditions.

However, it doesn’t mean that personal guarantees should contribute to the mortgage repayments every month.

It only means that the bank/lender can look for you if the asset fails to cover the said loan.

For LRBAs, most banks and lenders are focused on minimising financial risks than keeping tight competition. That’s why limited recourse loans tend to go after your assets if the super fund defaults on its repayments.

Can I invest in property using my SMSF?

You must evaluate whether your SMSF can cover a property investment before heading out and applying for a limited recourse loan.

For that, we highly advise speaking with your accountant and seeking professional help to get legal and financial advice.

Our mortgage brokers at Plan A Mortgage can also help you evaluate your current financial situation and discuss your options as to whether an LRBA will best suit your long-term investment plan.

What will happen after the loan settlement?

During the settlement, your bank/lender will hand over the loan amount to the bare trust. Then, the super fund will begin paying off the balance of the purchase value.

After acquiring the property, it will be registered under the name of the bare trust’s trustee. The trustee should grant a mortgage and guarantee that the bank/lender has the absolute right to take the asset and sell it in case of loan default.

Furthermore, the SMSF should earn the property’s income through the bare trust structure. But keep in mind that the super fund should also cover the property’s maintenance costs and mortgage payments.

When can I opt-out of the LRBA?

You can sign out of the limited recourse agreement as soon as you finished paying off the loan.

After that, you can keep the property in your bare trust or close the account and transfer the asset to the SMSF trustee instead.

Nevertheless, keeping legal advice and tax advice on these matters is crucial to ensure you’re heading on the right path and that your decisions are in your SMSF’s best interests.

Is the government banning LRBAs?

The Australian Government isn’t banning limited recourse borrowing arrangements. But the idea had been in talks for some time between the government and multiple industry agencies.

In 2015, the Financial System Inquiry (FSI) recommended prohibiting lending to super funds via limited recourse arrangements. However, the Australian government believes that there is insufficient data to justify the total ban.

Instead, the Self-managed Independent Superannuation Funds Association (SISFA) took shape, supporting the government’s decision to allow LRBAs.

Today, LRBAs remain an option for super funds in establishing a properly structured long-term and retirement plan under the SIS Act.