Borrowing with a Trust

What is a trust?

Trust documentsA trust is an arrangement which allows a person or company to own assets on behalf of another person, family or group of people. These people are known as the beneficiaries of the trust.

Assets are owned on behalf of “beneficiaries” but controlled by a “trustee” who can be either a company or a person. The trustee is governed by a “trust deed” which sets out the rules that the trustee must follow and also covers how profit is distributed to the beneficiaries.

Investment loans for trusts

Many people often use a trust to purchase their investment properties because of the asset protection and tax advantages of trusts. Unfortunately most lenders don’t know how to structure a trust loan correctly which can result in the borrower losing their tax advantages.

In addition to this many lenders cannot approve residential loans for trusts at all, which leaves many people wondering how they will be able to buy an investment property in a trust? Read on to find out how…

Is it possible for trusts to get discounted loans?

Yes! The secret to getting your loan approved is to know which lender can work with your particular type of trust and your proposed loans amount. In particular it is important to make sure that the lender processes your loan as a residential loan and not a commercial loan, otherwise you will pay a higher rate and more fees.

We are mortgage brokers that specialise in financing loans for trusts, please contact us to find out which loans are available for your situation.

What trust types can borrow money?

The most common types of trusts used for the purpose of property investment are:

Although all of the above trusts can apply for home loans, there are only a select few lenders that will approve them. In particular Hybrid Trusts and trusts with company / corporate trustees tend to be more difficult to finance.

We have made it our place to have all the answers so that your mortgage application is as smooth as possible!

How do lenders view trusts?

Banks and other lenders in Australia tend to view trusts as extra work for them, without any extra reward. Trust applications are very complex, often with legal issues to consider as well as more extensive paperwork to complete before approving the loan.

The majority of bank managers, mortgage brokers and credit staff do not understand how trusts work. Because of this trust applications tend to be bounced around between bank departments, resulting in delays and errors.

On top of this many bank managers do not actually know if their own bank does trust loans as many banks have ambiguous credit policies. One of Australia’s major banks in particular cannot do residential loans for trusts simply because their computer system can’t handle them!

Why doesn’t every bank lend to trusts?

Many banks believe that loans to some types of trusts could be legally unenforceable in the event that the borrower didn’t repay the loan. For example many lenders are worried that the Australian Taxation Office (ATO) may change taxation rulings about trusts, which in turn will affect the people they have lent money to.

The main reason why most lenders do not lend to trusts is that the loans are less profitable to them due to extra work of preparing mortgage documents and the checking of the trust deed.

How do banks get around these problems?

The major banks tend to refer many enquiries about borrowing using a trust to their business banking department.

This works well for the bank, more experienced staff handle the loan and charge the customer a higher rate and more fees. However it doesn’t work out well for you as the borrower!

Business banking is slow, expensive, may not include a low doc loan and tends to allow you to borrow far less than you can with a residential loan.

What do banks look for when assessing a trust loan?

When a lender receives a trust application they will then carry out a full credit assessment to decide if they should approve the loan. When assessing the loan they tend to look for:

  • The type of trust: Different types of trusts are assessed in different ways. Some banks prefer discretionary or family trusts while others are happy with hybrid, property investor and SMSF trusts.
  • The trust’s credit file: The directors and beneficiaries have credit files, but did you know that trustee companies and in some cases trusts have a credit file as well? The banks check the file for applications to other banks and for any blemishes.
  • The trust deed: The trust deed confirms who the beneficiaries and the trustee actually are. The deed will be checked to make sure that the trustee has the power to apply for loans for the trust.
  • The loan structure: Many people choose to have the loan in the name of the trustee or director of the trustee company rather than in the name of the trust. In other words the director of the trustee company is the borrower while the trust is the mortgagor. This is done to take advantage of negative gearing benefits when using a unit or hybrid trust.

Do lenders charge additional fees for trust loans?

Yes, all lenders will charge additional fees for lending money to a trust. This is reasonable because there is additional work for them to do in preparing the guarantee and indemnity documents for the trustee and the beneficiaries (if applicable) to sign. In most cases the additional legal fees charged by the bank are between $200 and $500.

Can the loan be in my name?

Yes, it is possible to setup the loan to be in the name of the trustee or director of the trustee instead of being in the trust.

For example if John Smith is the director of ABC Pty Ltd which is the trustee for The Smith Unit Trust then the loan could be set up in two ways:

Borrower: ABC Pty Ltd As Trustee For The Smith Unit Trust
Mortgagor / property owner: ABC Pty Ltd As Trustee For The Smith Unit Trust
Guarantor: John Smith

Borrower: John Smith
Mortgagor / property owner: ABC Pty Ltd As Trustee For The Smith Unit Trust
Guarantor: ABC Pty Ltd As Trustee For The Smith Unit Trust

Please note that some banks do not accept the second loan structure listed above. Please refer to your accountant for tax advice regarding the different structures and please refer to us to discuss which lenders can help with your proposed loan structure.

Are there low doc loans for trusts?

Yes it is possible to get approval for a low doc trust loan. A low doc loan will allow you to declare your income rather than providing tax returns as proof of your income.

There are only a few select lenders that can consider low doc loans for trusts so it is critical that you talk to us before you apply for a low doc loan using a trust.

What additional documents do the banks need?

There are several documents that the bank will need from you in order to process a loan for a trust. In particular they will need:

• A certified copy of the stamped trust deed.
• A certified copy of the company constitution (if there is a company trustee).
• Identification for all trustees, directors of trustees and beneficiaries of the trust.
• Tax returns and notices of assessment for the trust (not always required).

Please talk to us for a specific list of required documents.

Apply for a loan in a trust

At the home loan experts we will assist you in making sure all aspects of your trust loan are perfect for maximum returns on your investments. We know how a trust works and which lenders accept which kinds of trusts.