Avoid These SMSF Loan Refinance Mistakes in 2026

Can You Still Refinance an SMSF Loan After August 2026?

You can refinance an SMSF loan entered into before 10 August 2026 without restriction on property type, but any new limited recourse borrowing arrangement entered into from that date can only finance business real property.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June and its limited recourse borrowing provisions commenced on 10 August. If your SMSF already holds residential property under an LRBA entered into before that date, you can maintain or refinance that loan without needing to convert the property to business use. The real property financed under such an arrangement does not need to be business real property, whether it is residential or commercial. However, if you are entering into a new LRBA on or after 10 August to purchase real property, the property must be used wholly and exclusively in one or more businesses.

Consider a Rushcutters Bay professional who holds a unit in the suburb under an SMSF loan entered into in early 2025. The unit is tenanted to an unrelated party on a residential lease. That borrower can refinance their SMSF loan in late 2026 or beyond to access a lower variable rate or switch from a fixed rate that has expired, and the residential tenancy does not create a compliance issue because the LRBA was entered into before the August cutoff.

What Counts as a New Borrowing Arrangement

Refinancing an LRBA means entering into a new loan contract for the same asset, with the same or a new lender, and that new contract is subject to the law in place at the time of refinancing.

Under the general LRBA rules, a significant change to the terms or conditions of an LRBA ends the arrangement and starts a new one. Changes that result in a new arrangement include refinancing the original borrowing, a borrowing inconsistent with the earlier arrangement such as borrowing to acquire an asset or class of asset not contemplated under the original arrangement, and a change to the ultimate beneficiaries of the arrangement. If the original arrangement was entered into between 24 September 2007 and 6 July 2010, the current rules apply to the new arrangement. Varying the contract of borrowing does not always create a refinancing. This depends on the nature and extent of the variation and the intention of the parties. Relevant factors include whether the original agreement allowed the parties to vary the terms and whether an update to one condition ended up changing additional conditions.

In practical terms, switching from one lender to another always creates a new arrangement. Increasing the loan limit or drawing down additional funds may or may not, depending on whether the original loan facility contemplated those drawdowns. Each drawdown under a loan facility results in a separate borrowing and may result in a new borrowing arrangement. Drawdowns are allowed in certain circumstances, such as where the additional borrowing is applied in maintaining or repairing the asset or the drawdown is provided for under the terms of the original LRBA. Each drawdown must be reviewed by the trustee to determine whether the borrowing meets the requirements of super law, and a contravention occurs if it does not.

Fixed Rate Expiring: When Refinancing Becomes Urgent

If your SMSF fixed rate is expiring and you do nothing, the loan will revert to the lender's standard variable rate, which in most cases sits well above the lowest variable rates available in the current market.

Many SMSF loans written between late 2021 and mid 2023 were fixed at rates between 2.5% and 4.5%. Those fixed terms are now expiring, and revert rates on SMSF loans can sit between 6.5% and 8.5% depending on the lender. The gap between a revert rate and a competitively priced SMSF variable rate can be 1.5% to 2.5%, which on a loan balance of $600,000 translates to $9,000 to $15,000 per year in additional interest. That additional cost is drawn from the SMSF's cash flow, reducing the fund's ability to pay member pensions or make further contributions.

A fixed rate expiry on an SMSF loan requires early action because SMSF refinance applications take longer to assess and settle than standard home loan refinances. Lenders require updated trust deeds, trustee declarations, evidence of compliance with the sole purpose test, and confirmation that the asset is held in a compliant holding trust structure. If you wait until the fixed period has already expired, you may spend three to six months on the revert rate before the refinance settles. Starting the refinance process at least 90 days before the fixed term ends gives your broker time to compare offers, prepare documentation, and settle before the rate reverts.

Residential LRBA Refinancing: The Pre-August Exemption

An LRBA entered into before 10 August 2026 can be refinanced on or after that date without requiring the property to meet the business real property definition, provided the refinanced loan is secured by the same asset and the refinanced amount is the same or less.

The ATO has confirmed that the change to the meaning of acquirable asset does not apply where an SMSF maintains or refinances, on or after 10 August 2026, an LRBA entered into before that date. This means if your SMSF purchased a residential unit in Double Bay, Darling Point or Rushcutters Bay under an LRBA entered into in 2023, 2024 or early 2026, you can refinance that loan in late 2026 or beyond without the property needing to be used for business purposes. The exemption also applies where an SMSF exchanged a binding contract to acquire real property before 10 August 2026, even if the contract settles or the LRBA is entered into on or after that date.

If you refinance and increase the loan balance, the additional borrowing may be treated as a new LRBA. Where a new trust is created to hold the asset during refinancing, the asset must be transferred directly to the new trust and the SMSF must not temporarily obtain title. In most cases, refinancing with the same holding trust structure and a loan balance equal to or lower than the original avoids creating a new arrangement subject to the business real property rule.

Commercial Property LRBAs: No Change to Refinancing Rules

If your SMSF holds commercial property under an LRBA, refinancing that loan follows the same rules as before, because commercial property used wholly and exclusively in a business already meets the definition of business real property.

The August 2026 change was directed at residential property LRBAs, not commercial. If your SMSF purchased a commercial premises in Bondi Junction or Paddington under an LRBA, and the property is leased to an operating business on arm's length terms, that property satisfies the business real property definition whether the LRBA was entered into before or after 10 August. You can refinance the SMSF loan to access a lower rate, switch from fixed to variable, or move from a non-bank lender to a bank without triggering compliance issues, provided the loan continues to meet the standard LRBA conditions.

Those conditions include that the borrowed money must be used to acquire a single asset or a collection of identical assets with the same market value that can be treated as a single asset, that recourse against the SMSF trustee must be limited to rights relating to the asset, and that the asset cannot be subject to a charge other than as provided in relation to the borrowing. If you are refinancing a commercial LRBA with a related party lender, the terms and ongoing operation of the loan must remain consistent with a loan from an unrelated party, and the SMSF must not be charged more than an arm's length rate of interest.

Related Party Lenders and Arm's Length Compliance

A related party can lend to an SMSF under an LRBA, but the terms and ongoing operation of the loan must be consistent with a loan from a lender who is not a related party, and the SMSF must not be charged more than an arm's length rate of interest.

The calculation of an arm's length rate needs to be based on reasonably objective and supportable data, such as the Reserve Bank of Australia's Indicator Lending Rates for a similar borrowing. The ATO's Practical Compliance Guideline PCG 2016/5 sets out arm's length terms for LRBAs established by SMSFs. Appropriate documentation, such as a written loan agreement, is needed to show a genuine borrowing. Without it, the amount provided by the related party might be considered a contribution received by the SMSF. A related party can on-lend to the SMSF at a higher rate of interest than it pays, provided the SMSF is not charged more than an arm's length rate. For LRBAs entered into from 7 July 2010, the related party lender must not use the asset the SMSF is acquiring as security for their own borrowing.

If your SMSF borrows from a family trust or related entity and the interest rate charged is above an arm's length rate, the excess may be treated as non-arm's length income and taxed at 45 per cent rather than the concessional super rate of 15 per cent. When refinancing a related party LRBA, the new loan agreement must document an interest rate that can be defended as arm's length at the time the refinancing occurs, not the rate that applied when the original loan was entered into.

Offset Accounts and Non-Bank Lenders

Genuine offset accounts offered by an authorised deposit-taking institution are allowed under an LRBA because they are not a borrowing or a charge over fund assets, but offset accounts offered by non-bank lenders are not bank deposits and may not be compliant.

If you are refinancing from a major bank to a non-bank lender and your current loan includes an offset account, confirm whether the new lender is an ADI and whether the offset facility meets the ATO's definition of a genuine offset account. An offset account that operates as a redraw facility or involves a charge over other SMSF assets may breach the limited recourse requirement. In some cases, losing access to an offset account is an acceptable trade-off for a lower interest rate, particularly if the SMSF does not hold significant cash balances. In other cases, the value of the offset justifies staying with an ADI lender even if the rate is marginally higher.

When comparing SMSF refinance lenders, also confirm whether the lender allows interest-only repayments and whether the loan can be held in the name of the holding trust with the SMSF trustee as guarantor. Some lenders require principal and interest repayments on all SMSF loans, which increases the cash flow requirement and may not suit funds with older members drawing pensions. A specialist SMSF refinance broker can identify which lenders offer the features your fund needs and which impose restrictions that would require a change to your fund's cash flow structure.

Refinancing an SMSF loan involves more moving parts than a standard home loan refinance, particularly where the loan was entered into before the August rule change and you want to preserve the exemption for residential property. The documentation, trust structure, and interest rate all need to be assessed for compliance before settlement. Call one of our team or book an appointment at a time that works for you to discuss your SMSF loan refinance options and confirm which lenders can support your fund's structure and property type.

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