Did you know that if you have a trust, you may be able to use it to increase your borrowing power?

How? You can set up an advanced strategy that allows you to exclude debts from serviceability assessments if an accountant can confirm for lenders that a property is positively geared.

We have outlined how this works below and have provided a specific example that shows how you can potentially access more than $2 million of borrowings on a single income not much higher than $100K.

How It Works

The strategy goes like this: After you acquire the first mortgage, we obtain a letter from your accountant that confirms the property is now positively geared (i.e., that its own rental income can cover its mortgage repayments and other costs of ownership).

Then, when we apply for the next mortgage, we provide this letter from the accountant verifying your property’s positive gearing, allowing a lender to ignore that mortgage entirely during the serviceability assessment, freeing up your borrowing capacity again so you can buy the next property.

You repeat this process for each property, collecting an accountant’s letter vouching for the property being positively geared each time. The lender will ignore the debt in those mortgages when determining your borrowing power for the next property.

Generally, people executing this strategy use separate trusts for each purchase, and they use a corporate trustee. Each property involved must be positively geared.

Roadblocks

• Not all lenders will allow this; however, we currently have about five lenders that have an appetite for this kind of transaction.
• Most people using this strategy opt for interest-only loans, because they have lower repayments, meaning less income is needed to reach positive gearing; however, interest-only terms do not last forever. Most lenders offer a maximum of five years and then the loan reverts to principal-and-interest repayments. As such, to increase the interest-only period, the loan would need to be refinanced/changed at the end of the original interest-only period (typically five years).
• Your accountant will need to be comfortable with providing accountant’s letters to confirm each trust is trading profitably in order for you to move onto the next purchase.
• A number of buildings with strata will not allow short-term rentals, so it is suggested that you buy freestanding houses.

An Example

Andrew is a 28-year-old engineer who lives with his parents rent free, and is looking to build a property portfolio. He earns $111K base salary and has no children, no partner and no other debts. Andrew has saved $200K and his family is prepared to gift him additional money to help with deposits if he can gain enough borrowing capacity.

For his first purchase, he acquires a freestanding house in Adelaide for $700K through a trust, borrowing $560K (an LVR of 80%) with an interest-only loan.

The house’s rental yield is 5% when Andrew buys it. He puts it onto Airbnb a few months after acquiring it, boosting its rental yield. It is positively geared in its second month of operation. So Andrew shows his accountant the Airbnb income and his mortgage repayments, and the accountant wrote a letter confirming that the trust was trading profitably and meeting its liabilities. We can now go for a second property purchase, using this letter to convinve the lender to exclude the debt on the first property entirely during assessment.

Next, Andrew requests a gift from his family – 20% of the value of the next property to purchase, plus costs. He shows the accountant’s letter to the lender, proving that the investment property he just purchased is positively geared. The lender, therefore, ignores that debt when determining Andrew’s borrowing power, so he has enough to proceed with another $700K purchase. He borrows another $560K, in another interest-only loan, this time for a house in Perth.

The rental yield is again 5%, when Andrew buys the house. He once again puts the house on Airbnb a few months after acquiring it, and it is positively geared in its second month of Airbnb operation.

Now with two properties and an accountant’s letter for each, Andrew repeats this process two more times, obtaining an accountant’s letter both times, to maintain his borrowing power.

At this point, Andrew is still only on $111K salary and we have accumulated four properties, with mortgages of $2.24 million ($560K x 4) of debt, equating to more than 20 times his current salary.

If we had not used this strategy, he would not even have had enough borrowing power to complete the second purchase, if renting out property as normal.

Know The Risks Involved

• Selling at a loss: This strategy will have you holding substantial leverage, which cuts both ways and could put you in a precarious position. If market prices fall, you could end up with properties that are worth less than what you paid for them (an underwater mortgage). This could put you at substantial risk of selling at a loss and not having the cash to cover that loss, which could mean bankruptcy.
• Rising interest rates: If interest rates on your loans go up, you may not be able to cover your repayments, which, again, could put you in financial difficulty. It may force you to sell and may affect your credit file. These are serious implications that must be taken into account.
• Trust suitability: Some trusts, such as unit trusts, may be unsuitable for this strategy, due to lenders not accepting their structure. You should discuss with your accountant whether a trust is right for you.
• Tax considerations: You also should discuss with your accountant whether trusts are suitable for you from a tax perspective before proceeding with this strategy.

Things To Remember

• With a history of Airbnb income, some lenders will consider using the full amount, which may boost borrowing power over and above excluding the debt; however, that is not assumed for this example.
• This strategy could also work using normal positively geared properties (i.e., not on Airbnb) or by renting out individual rooms (or similar strategy), it just has to be positively geared.

Contact Us Today To Learn More!

To discuss this strategy further and see how it could work for you, please reach out to Home Loan Experts Senior Mortgage Broker Jonathan Preston: 0414 549 318 (Available to take calls 10am AEST to 5:30pm AEST); jonathan@homeloanexperts.com.au