SMSF property borrowing changes: what you need to know

It's hard to argue with the idea that Australians love property. Be it a unit, duplex, house or holiday cottage, residential property is an investment that's easy to understand, and it comes with the reassurance of being able to say "I own that" - something that's a lot harder to do with other investments like shares. 

But for the 1.2 million Australians who, as at March 2026, were members of one of the 672,000-plus self-managed super funds (SMSFs), the opportunities to add residential property to a retirement fund just got more limited.

August 10 marked the end of SMSFs being able to borrow to fund residential property.  

Nothing will change for SMSFs with a loan already in place or a binding contract to buy residential property entered into before 10 August. And let's be clear, SMSFs can still invest in houses or apartments - they just can't borrow to fund the purchase. 

On the flipside, SMSFs can still borrow to fund other investments, notably commercial property. 

Why the ban on borrowing for residential property? 

Put simply, the Albanese government agreed to ban SMSFs from entering new limited recourse borrowing arrangements for residential property in return for the Greens to support the Federal Budget's overhaul of negative gearing rules and the capital gains tax (CGT) discount. 

In essence, the reforms are designed to make it easier for first homebuyers to get into the market. 

Even so, the move has caused quite a stir in the SMSF community. Understandably, some SMSF members feel the government is limiting their choice of retirement investments.  

And, we've seen a rush of SMSFs lining up for finance to buy a property. Broking group Loan Market saw weekly applications surge over 400% year-on-year in July 2026, while the Australian Finance Industry Association (AFIA) reports that its member lenders wrote more than 16,000 residential super loans in the past financial year.   

Residential property is only a small piece of the SMSF pie  

The thing is, residential property makes up a relatively small fraction of total SMSF investments. 

Based on the latest available annual Tax Office data for 2023-24, only one in 10 SMSFs hold residential property.

More recent Tax Office data, as at March 2026, show residential property makes up less than 6% of total SMSF assets.

The biggest investments by far across SMSFs are listed Aussie shares ($273 billion) and cash and term deposits ($166 billion), accounting for about 26% and 16% respectively of SMSF assets.

There are good reasons why residential property remains a relatively small part of SMSF portfolios. 

To begin with, negative gearing is far less powerful in terms of tax savings with a SMSF. The fund's flat tax rate of 15% (in the accumulation phase) means ongoing property losses save much less tax inside super than if they are claimed by high-income earners outside of super. 

On top of this, the potential vacancy periods and high annual outgoings of residential property can be a cash drain on SMSFs. The fund may have to rely on other sources of income, such as member contributions or dividends on shares, to help pay a property's regular costs - anything from rates and repairs to insurance and loan interest.  

The trade-off for weaker negative gearing tax perks is that SMSFs, like all super funds, generally benefit from a 15% tax rate in accumulation phase and an effective 10% capital gains tax rate on assets held for at least 12 months. And if the property is sold when the fund is fully in retirement phase, the tax bill could be zero.

Even so, if you need extra income in retirement, your SMSF can't simply sell a bedroom in the way that it could, say, sell a few shares or units in an exchange-traded fund (ETF). 

And, when it comes to generating money to live on, gross rental yields on residential property are typically low - currently around 3.7% nationally, according to Cotality. At the time of writing, that was less than the dividend yields on some well-known Aussie shares like Telstra (4.0%), Transurban (4.71%) or Fortescue (6.79%). 

Long story short, residential property can be a high-cost, high-maintenance investment for SMSFs.This may help explain why professionally managed super funds have traditionally favoured commercial property over residential property.

Which brings us to another issue... 

Will all eyes now shift to commercial property? 

Commercial property (owned by around 73,000 SMSFs in 2023-24) is a slightly more popular investment for mum-and-dad super funds than residential property (around 68,000 SMSFs).

That's largely because the drivers for investing in commercial property - think small strata warehouse units, retail spaces and small office units - can be very different. 

For small business owners or self-employed workers like tradies, there can be real upsides to owning a commercial property through their SMSF. It gives them certainty over their premises, while their business pays rent into their SMSF. 

As always, strict rules apply. The property must be used for business purposes and the business must pay market rent, for example. 

But if the owners sell the business when they retire, they can hold onto the property and keep earning rent.  

Better still, small office suites, warehouses and retail spaces can cost less than a residential property.   

On top of this, under a commercial lease, tenants may pay some of the property outgoings in addition to rent, depending on the terms of the lease. As a result, net rental yields can be higher than for residential property. 

It can make commercial property a low-maintenance, high-yield asset if - and it's a big if - you select the right property.  Of course, commercial property isn't without risks.

The bottom line 

The days of using leverage to buy residential properties through super may be over.

But could this spark a commercial property boom?

Time will tell. Either way, commercial property may attract more attention, and not just from SMSFs. For investors outside super, the new negative gearing rules apply to residential property, not commercial property.

If you're thinking of going down that road, starting up your own SMSF and investing in commercial property are two areas where specialist help is essential, so talk to a licensed financial adviser and your accountant.