Limited Recourse Borrowing Arrangements Explained
Understanding Limited Recourse Borrowing Arrangements for SMSFs
Self-managed super funds (SMSFs) are becoming more and more popular in Australia. They offer flexibility, control, and the potential for higher returns than regular super funds. However, it’s important to understand all the rules and regulations of an SMSF before investing in one. One such regulation is limited recourse borrowing arrangements (LRBAs). It’s important to understand what LRBAs are before investing in an SMSF.
What Is a Limited Recourse Borrowing Arrangement (LRBA)?
A limited recourse borrowing arrangement (LRBA) is an arrangement that allows a self-managed super fund (SMSF) to borrow money to purchase assets such as real estate or shares. The loan must be secured against a single asset purchased with borrowed funds—not the entire portfolio of assets held by the SMSF. This means that if the asset fails to generate returns or its value falls, then only the asset can be used to repay the loan, not other assets held by the super fund. It also means that lenders can't take any other legal action against you if you fail to meet your repayment obligations (unless a personal guarantee is provided.
What Are The Benefits Of An LRBA?
The main benefit of using an LRBA is that it allows an investor to access funds they don't have available in their SMSF account yet, which can be used to purchase assets like property or shares that they may not have been able to afford otherwise. This gives them more flexibility when it comes to investing and can potentially increase their return on investment over time. Additionally, because LBRA loans are secured against a single asset, there is less risk involved than with unsecured loans or investments made without borrowed funds. That said, it's important for investors to conduct thorough research into each potential investment before entering into an LRBA agreement so they know exactly how much risk they're taking on with each transaction.
Who Can Enter Into An LRBA?
Any person aged 18 years or older who is a trustee or director of an Australian regulated self-managed super fund (SMSF) can enter into an LRBA agreement with a lender who has been granted approval from ASIC as a credit provider for these types of arrangements. It's also important that all trustees and directors involved in setting up the LRBA are familiar with their rights and obligations under superannuation law and understand how LRBAs work before entering into any agreements with lenders.
In summary, limited recourse borrowing arrangements are beneficial for those looking to invest in an SMSF but don't have enough liquid capital available at the start of their journey. LRBAs allow investors to borrow money against one specific asset instead of having unsecured debt hanging over their heads while still affording them increased flexibility when investing through their SMSF account. As always though, it's important for investors looking into this form of funding to do extensive research ahead of time so as not to expose themselves to high levels of risk when making these types of investments through their SMSFs.