Can an SMSF invest in private mortgages? How SMSFs lend, the rules and the tax

Yes. An SMSF can invest in private mortgages by lending to unrelated borrowers, secured by a registered mortgage over property, if its trust deed and investment strategy allow it. The investment must meet the sole purpose test, be on commercial arm’s length terms, and be documented and secured. The fund cannot lend to members or their relatives.

SMSFs commonly co-fund loans with HomeSec Business Finance, an Australian private lender founded in 2004. This guide sets out the rules that apply, how the investment sits in your fund’s name, and how the income is taxed. It is general information; your SMSF accountant or auditor can confirm how it applies to your fund.

Why are SMSF trustees looking at mortgage investments?

Because a lot of SMSF money sits in cash. As at March 2026, there were 672,805 SMSFs holding $1.06 trillion, with cash and term deposits making up 16% of assets.

For trustees in or near retirement, that cash has a job: paying pensions without selling shares in a falling market. But at around 5% p.a. for the highest 12-month term deposits, it does little more. A loan secured by property can sit between cash and shares, paying a contracted rate for a defined term.

The question is how to do it within the rules.

What rules apply when an SMSF lends money?

The ATO’s requirements come down to eight points.

Can an SMSF lend money to anyone?

To an unrelated borrower, yes, within the rules above. That is the position when an SMSF co-funds a loan with HomeSec: the borrower is an unrelated business, the terms are commercial, and the loan is secured by a registered mortgage over Australian real estate.

To a member or a relative, no. The ATO is clear that an SMSF cannot provide loans or financial assistance to a member or a member’s relative.

To other related parties, such as a company or trust a member controls, it is possible but limited. Those loans are in-house assets, and in-house assets cannot exceed 5% of the market value of the fund’s total assets. If they do at the end of a financial year, the trustees must prepare a written plan to bring them back to 5% or below. A loan to an unrelated borrower is not an in-house asset, so the 5% limit does not apply to it.

What should the investment strategy say?

The ATO says a fund’s strategy should consider risk and likely return, diversification, liquidity and members’ insurance, and be reviewed at least annually, with the review documented.

For a mortgage investment, that means recording:

• Why the investment fits the fund’s objectives, for example stable income to pay pensions.
• How much of the fund can go into secured loans, and how that affects diversification. If a single loan is a large share of the fund, the strategy should show you considered that concentration.
• How liquidity is managed. Loan terms of 1 to 12 months, and the fund’s other cash, should cover pensions and expenses.

Trustees should check both the deed and the strategy before committing. It is usually a short update, not a rewrite.

How does the loan sit in the SMSF’s name?

When an SMSF co-funds a loan with HomeSec, everything is in the fund’s name.

The loan agreement is prepared in the name of the SMSF’s trustee, as trustee for the fund. The borrower signs with their own solicitor present. The registered mortgage names the trustee for the fund’s exact contribution, alongside HomeSec. The fund transfers its contribution from its own bank account at settlement.

Principal and interest are then paid directly to the SMSF’s bank account, not to HomeSec and not to a member. That keeps fund assets separate and makes the audit trail simple. Your auditor will see a loan agreement, a registered mortgage and repayments landing in the fund’s account. For the full process, see how co-funding works.

How is the income taxed?

Interest earned by the fund is fund income. Under the ATO’s rules for how SMSFs are taxed:

• Accumulation phase: taxed at 15%.
• Retirement phase: income from assets supporting a retirement-phase income stream is exempt (0%).
• Non-arm’s length income: taxed at 45%, which is why commercial terms matter.

From 1 July 2026, Division 296 applies an additional 15% tax to a share of earnings for members whose total super balance exceeds $3 million, and a further 10% above $10 million. It is assessed to the member, but trustees must calculate and report the fund’s earnings.

Interest is not subject to GST, as lending is an input-taxed financial supply.

As an illustration, $250,000 lent at 12% p.a. for 12 months earns $30,000 in interest. In accumulation phase, tax at 15% leaves $25,500. Supporting a retirement-phase pension, the fund keeps the full $30,000, before any Division 296 tax. These figures assume the loan is repaid on time.

What are the risks for an SMSF?

A mortgage investment is not a term deposit. Moneysmart notes that private credit is not covered by the Financial Claims Scheme. The main risks are a borrower repaying late or defaulting, and the time it takes to sell a property if a loan must be enforced.

HomeSec limits loans to 80% LVR on residential property and lower on commercial, does not fund development or construction, and co-invests its own money in every loan. It meets the legal costs of recovery on defaulted loans. The difference between first and second-ranking security is explained in first and second mortgage investments.

On liquidity, loans run for 1 to 12 months and there is no pool to freeze. If the fund needs its money early, HomeSec will buy out its share and repay the principal.

Does an SMSF need to be a wholesale investor?

To co-fund with HomeSec, yes, and this is where SMSFs need care. The wholesale tests apply differently to super funds, and AFCA has taken a strict view. We explain the detail, and where the law is contested, in can an SMSF be a wholesale investor?

What are the practical steps?

1. Check the trust deed permits lending and taking mortgage security.
2. Update the investment strategy to cover secured loans, including concentration and liquidity.
3. Confirm wholesale status for the fund with your adviser.
4. Review each loan’s pack and record the trustees’ decision in the minutes.
5. Invest in the fund’s name, from the fund’s bank account, with repayments to the same account.
6. Keep the documents for your auditor: loan agreement, mortgage, pack and minutes.

Our page for SMSF investors covers how SMSFs co-fund with HomeSec. If you’d like to see what a loan pack looks like, register your interest and our Funding Manager will be in touch.