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SMSF lending matures – but complexity remains beneath the surface

29 October 2025 | Share this article:

After 18 years in existence, the limited recourse borrowing arrangement (LRBA) market has moved from experimental to established. Yet, despite its maturity, misconceptions about how SMSF lending works – and where the real risks lie – continue to surprise even experienced advisers and brokers.

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According to Bluestone Home Loans head of specialised distribution Richard Chesworth, the SMSF lending market has now reached a point of stability and predictability that belies its reputation for complexity.

“What surprises the market is that there’s still this perception it’s all complex and difficult – a bit of the unknown,” Chesworth said. “But it’s been around for 18 years now. We even marked its birthday in September, because it really has come of age.”

The market, he said, is now well-regulated, with most of the uncertainty from earlier years long resolved.

“We’ve had reviews by the Council of Financial Regulators over a number of years, and they’ve reached a position where they would only review again on an as needs basis.”

Sizing the SMSF lending market

Part of the confusion around SMSF borrowing stems from the way the Australian Taxation Office (ATO) presents data. Chesworth noted that the figures can easily be misinterpreted by those unfamiliar with how the statistics are structured.

“The LRBA market in December 2024 was $72 billion. I read that for a long time thinking that’s the amount of the borrowings, but that’s the actually the amount of assets,” he explained. “Then you go down the line and you’ve got $27 billion worth of debt.”

In the broader context of Australia’s lending market, that number is relatively small – but still represents a sophisticated and active segment within the SMSF ecosystem.

“It’s not $72 billion of borrowing, it’s $27 billion. And when you look at the size of that in the overall lending market, it’s pretty insignificant as a number,” he said, adding that the gearing levels have actually come down over time.

“You’re looking at gearing now as a portfolio view, at around 38 per cent of the overall market.”

Richard Chesworth Bluestone Home Loans Head of Specialised Distribution

Staying within the boundaries

While the legislative framework allows borrowing in limited circumstances, Chesworth emphasised that sticking to those boundaries is critical.

“It’s really important we all stick within our swim lanes and we all play a key role for our customers at the end,” he said.

Under current regulations, SMSFs can borrow to acquire an asset and, under certain conditions, to maintain or repair it. However, they cannot borrow to improve an asset – and the distinction between “maintenance” and “improvement” is a technical but crucial one.

“I use the example the ATO provided in some of their guidance papers. I always look at the old kitchen in a house,” Chesworth said. “Installing the dishwasher, I would have thought was an improvement when there wasn’t one there before, but the ATO in their written guidance state installing a dishwasher is maintaining the kitchen, because we all expect dishwasher in our kitchen.”

Conversely, if a trustee were to move a wall or substantially change the layout, that would likely be deemed an improvement and therefore a prohibited use of borrowed funds.

The grey area between the definitions makes redraw facilities potentially risky. While some lenders have recently reintroduced redraw options for SMSF loans for approved purposes, Chesworth cautioned that they must be handled carefully.

“Redraw is deemed new borrowing, so that needs to fall under maintenance and repair of the acquired asset,” he said, adding that just because you can redraw doesn’t mean you should.

“It’s really important we all stick within our swim lanes and we all play a key role for our customers at the end.”
Richard Chesworth, Head of Specialised Distribution of Bluestone Home Loans

The refinancing opportunity – and its traps

One area where advisers can add genuine value is refinancing. With the major banks largely having exited SMSF lending since 2019, many borrowers remain on outdated and uncompetitive rates.

“we’re refinancing loans where we’re seeing, in some cases, over a 3 per cent differential in the interest rate,” Chesworth said. “We refinanced a loan that was $538,000 and it was close to $20,000 per annum in interest savings.”

However, refinancing carries its own technical pitfalls – especially around the grandfathering of pre-2018 LRBAs.

“If you’ve got an LRBA established before 30 June 2018, it’s grandfathered so it’s not impacted in your total super balance calculations,” Chesworth said.

“If you refinance that loan … you increase the borrowing by $1 and it falls under the new rules. Your grandfathering disappears. Then your LRBA component may impact your total super balanced calculation.”

“It’s really important we all stick within our swim lanes and we all play a key role for our customers at the end.”

Richard Chesworth, Head of Specialised Distribution of Bluestone Home Loans

High gearing

While the broader property market remains comfortable with high loan-to-value ratios, Chesworth said SMSF lending requires a different mindset, and that Australia is “hardwired” for negative gearing.

Superannuation is a low tax environment and within the accumulation phase members are taxed at 15 per cent.

He noted that some lenders have started offering up to 90 per cent LVR loans, but questioned whether that was appropriate for some SMSFs.

“Why would you be going to 90 per cent in a low tax environment, unless the yield was so strong on the property, and that’s generally not the case in the [residential] market,” he said.

Trustees should also consider the broader portfolio implications.

“If all your contributions and rent and non-concessional contributions have gone to service the lender’s interest bill, what are you achieving as a member and trustee of the fund?” Chesworth said. “It’s that question, when is enough, enough?”

Offset accounts: a new technical frontier

Another emerging area of complexity lies in offset accounts – a feature once common in SMSF loans but now more rare due to regulatory uncertainty.

“Historically, back in the 2010s to 20s, there was a number of lenders with offset accounts … What they all had in common in their name was the word bank,” Chesworth said.

He added: “That offset account is clearly a separate account. In the non-bank space, and at Bluestone we’re a non-bank leader, we don’t have a licence to hold deposit funds. So, for us and non-bank lenders, your offset account is technically an offset sub account.”

That distinction matters, because funds held in a sub-account raise compliance questions

“If the ATO is comfortable deeming it redraw, the funds [that members] take out can only be used for maintenance and repair of the acquired asset. No other purpose. You can’t improve the asset; you can’t go and use those funds to buy another property.” Chesworth said.

He noted that the ATO has recently updated its guidance, recommending trustees and advisers do proper due diligence into how those accounts are structured.

“SMSF lending requires a different mindset, and Australia is ‘hardwired’ for negative gearing.”

Richard Chesworth, Head of Specialised Distribution of Bluestone Home Loans

Getting the setup right

Ultimately, Chesworth said most compliance breaches and costly errors stem from poor setup or emotional decision-making, particularly when SMSF trustees are eager to buy property.

“Remove the emotion, it’s a financial transaction,” he said. “I think it’s important that, as I mentioned before, an accountant plays a key role in the support and management of an SMSF, supporting their customer, the SMSF trustee.

“The financial planner does, a solicitor does. But equally, a mortgage broker does. A mortgage broker is not licensed to provide financial advice, they’ve got to stick to credit assistance. A financial planner or an accountant aren’t licensed provide credit assistance. That’s why, as an industry, we really need to work together.”

Getting the structure right from the start – including the timing of the bare trust and trustee appointments – is crucial.

“These things vary by state, and if they’re done incorrectly, you could be facing double stamp duty years down the track,” he said.

For advisers and brokers, Chesworth said the biggest takeaway is to partner with lenders who truly understand the SMSF space.

“We’ve had a flurry of lenders come to the market in the SMSF lending space, non-bank lenders, and the experience levels vary broadly between them,” he said. “We’re seeing it’s a value proposition, not a rate proposition, because we need to get our customers over the line on time.”

Working with an experienced lender ensures smoother settlements, but can also provide greater compliance certainty regarding the structure of the loan.

“You hear cases of lenders and planners, accountants, brokers, saying if you purchase in the SMSF, you should be negotiating a longer settlement,” Chesworth said.

“Well, that’s wrong in the SMSF space, if you’re a specialist lender who understands a segment, you should be able to deliver in exactly the same time as the standard home purchase or standard commercial purchase. It shouldn’t take longer.”

“If you’re a specialist lender who understands the segment, you should be able to deliver in exactly the same time as a standard home or commercial purchase. It shouldn’t take longer.”

Richard Chesworth, Head of Specialised Distribution of Bluestone Home Loans

In a mature market still misunderstood by many, experience remains the difference between opportunity and risk.

The information provided in this article is general in nature and is not intended to be financial advice. This outcome reflects one customer’s unique situation. Every application is assessed individually. We always recommend you seek your own, independent financial advice which can take into consideration your specific circumstances.

Tune in to hear more!

Bluestone Home Loans head of specialised distribution, Richard Chesworth, joins host Keith Ford to break down the nuances of limited recourse borrowing arrangements (LRBAs).

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Bluestone Home Loans

Bluestone Home Loans is one of Australia’s leading non-bank lenders. Over the past 25 years, Bluestone has built a reputation on service, product, and innovation; developing solutions to help more Australians achieve their property ambitions. Bluestone provides home loan options for borrowers from all walks of life; with owner-occupier and investor solutions, along with specialist options for SMSF property investors and self-employed borrowers.

Bluestone Home Loans is one of Australia’s leading non-bank lenders. Over the past 25 years, Bluestone has built a reputation on service, product, and innovation; developing solutions to help more Australians achieve their property ambitions. Bluestone provides home loan options for borrowers from all walks of life; with owner-occupier and investor solutions, along with specialist options for SMSF property investors and self-employed borrowers. VIEW ALL ARTICLES

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