In 2025, borrowing through a Self-Managed Super Fund (SMSF) remains a popular strategy among Australian investors seeking greater control over their retirement savings. However, using borrowed funds within an SMSF involves navigating a complex framework of regulations, financial risks, and eligibility criteria.
This article offers a comprehensive overview of SMSF borrowing for the year 2025 — including current interest rates, lending requirements, compliance considerations, and potential pitfalls that trustees should be aware of.
What Is SMSF Borrowing?
An SMSF is a private superannuation fund that allows members to make their own investment decisions. One of the investment strategies available is acquiring property via borrowed funds under a structure called a Limited Recourse Borrowing Arrangement (LRBA).
Under an LRBA, the loan is secured solely by the asset being purchased — not by the other assets held in the SMSF. If the fund defaults, the lender has no claim on the fund’s other investments.
Interest Rates in 2025
In the context of ongoing inflationary pressure and elevated interest rates from the Reserve Bank of Australia, borrowing costs for SMSFs remain high in 2025.
Average interest rates include:
- Residential property: 6.2% to 7.4% per annum
- Commercial property: 7.0% to 8.6% per annum
- Fixed-rate options (1–5 years): 6.8% to 7.9%
Non-bank lenders are active in this segment, but their terms may be less flexible and involve higher setup fees.
Core Requirements for SMSF Borrowing
Borrowing through an SMSF is subject to strict regulatory conditions. Trustees must ensure full compliance to avoid penalties and invalid loan structures.
1. Fund Trust Deed
The SMSF trust deed must explicitly allow for borrowing. If the deed is silent or prohibits borrowing, it must be updated before initiating any LRBA arrangement.
2. Purpose of the Loan
The loan must be used solely to acquire a single acquirable asset (such as a residential or commercial property). Borrowed funds cannot be used for improvements, renovations, or personal use.
3. Holding Trust Structure
The asset must be held in a separate bare trust. The legal title is held by the custodian, while the beneficial interest belongs to the SMSF. This ensures limited recourse for the lender.
4. Minimum Deposit
Lenders typically require an upfront deposit of 20% to 35% of the property value. For commercial properties, the deposit may be even higher.
5. Cash Flow and Liquidity
The fund must demonstrate it has adequate liquidity or consistent rental income to meet loan repayments. Most lenders require reserves equal to at least 6–12 months of repayments.
6. Independent Valuation
An independent market valuation of the property is mandatory. The lender also assesses rental yield and capital growth potential before approving the loan.
Benefits of SMSF Borrowing
When used appropriately, borrowing through an SMSF can provide trustees with several long-term advantages.
Capital Growth
Using leverage allows the SMSF to invest in larger or more valuable properties, amplifying potential returns as the property appreciates.
Tax Efficiency
Investment income within SMSFs is taxed at a concessional rate of 15%. Upon entering the pension phase, the tax rate can drop to 0%, including rental income and capital gains.
Control and Transparency
SMSF trustees have full control over the choice of property, tenant agreements, and long-term strategy, which is attractive for seasoned investors.
Asset Protection
Because of the LRBA structure, if the SMSF defaults on the loan, only the asset acquired through the borrowing is at risk. Other SMSF assets are protected from the lender.
Key Risks
SMSF borrowing comes with significant risks that must be carefully considered.
Interest Rate Exposure
With interest rates remaining high in 2025 and possibly rising further, loan repayments may increase significantly. This can affect the cash flow and solvency of the SMSF.
Illiquidity
Real estate is not a liquid asset. If the fund needs to sell quickly, it may be forced to do so under unfavorable market conditions, potentially at a loss.
Use Restrictions
The property must be rented at market rates and cannot be used for personal purposes by members or related parties. Any breach may result in regulatory penalties.
Compliance Risk
Failure to adhere to the Superannuation Industry (Supervision) Act (SIS Act) can lead to the SMSF being deemed non-compliant, resulting in heavy taxation and disqualification of trustees.
High Transaction Costs
Setting up an LRBA involves significant costs, including legal advice, trust deed amendments, bare trust establishment, valuations, and lending fees — often ranging from €5,000 to €10,000 or more.
2025 Market Trends
Some notable trends affecting SMSF borrowing this year include:
- Increased interest in commercial properties, such as medical centers, logistics hubs, and office warehouses
- Growing use of digital platforms for managing property and SMSF compliance
- Stricter credit assessments and documentation requirements from both banks and alternative lenders
- Rising demand for sustainable and ESG-compliant assets within SMSFs
Trustees are becoming more sophisticated in portfolio construction, often incorporating property into a diversified long-term retirement strategy.
Who Is SMSF Borrowing Suitable For?
This strategy is best suited for:
- Experienced investors with at least €150,000 in SMSF assets
- Individuals with steady income and the ability to withstand interest rate fluctuations
- Trustees with access to professional legal, financial, and accounting advice
- Long-term investors targeting capital growth over a 10–15 year horizon
For new or small SMSFs, the risks and compliance complexity may outweigh the benefits.
Alternatives to LRBA
Trustees not comfortable with borrowing may consider alternative investment strategies:
- Purchasing property outright using existing SMSF cash
- Investing in listed property trusts or REITs
- Participating in fractional ownership or syndicated property funds
These alternatives offer diversification and reduced administrative burdens compared to LRBA structures.
Conclusion
Borrowing through an SMSF in 2025 remains a powerful but complex financial strategy. When executed correctly, it offers leverage, tax benefits, and direct control over real estate investments. However, it also comes with high entry costs, regulatory scrutiny, and significant responsibility for trustees.
Before proceeding, SMSF members should undertake detailed feasibility analysis, seek independent advice, and ensure their fund’s structure and investment strategy align with both short- and long-term retirement goals. With careful planning, SMSF borrowing can be a valuable tool for building a more robust retirement portfolio.
