Many people use a trust to purchase their investment properties because of the asset protection and tax advantages they offer.
Unfortunately, most lenders don’t know how to structure trust loans correctly which can result in the borrower missing out on these tax advantages.
Our popular articles on borrowing with a trust
Can I get a loan in my trust?
Not every lender requires beneficiaries to be guarantors.
Do unit holders need to guarantee the loan?
Why is it hard to borrow money?
How do banks assess company home loans?
Are there any restrictions?
What do banks look for?
When a lender receives a trust application they will 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: Trusts are assessed in many different ways. Some banks prefer discretionary or family trusts while others are happy with hybrid, property investor and self-managed superannuation fund (SMSF) trusts.
- The trust credit file: The directors and beneficiaries of a trust 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.
- The beneficiaries: Did you know that some lenders require all adult beneficiaries to be guarantors? Most trusts have two, three or more beneficiaries and these structures can make it difficult to borrow money.
We know what the banks look for when it comes to trusts!
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our broker today!
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:
- A certified copy of the stamped trust deed.
- A certified copy of the company constitution (if there’s 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, in particular for low doc or for new trusts).
Please talk to us on 1300 889 743 or fill in our free assessment form for a specific list of required documents.
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 loan amount.
It’s important to make sure that the lender processes your loan as a residential loan and not a commercial loan, otherwise you’ll pay more fees and a higher rate.
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.
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 don’t understand how trusts work so trust applications tend to get bounced between bank departments, resulting in delays and errors.
On top of this, many bank managers don’t actually know if their own bank does trust loans as many banks have ambiguous credit policies.
One of Australia’s major banks in particular can’t lend residential loans for trusts simply because their computer system can’t handle them!
We are mortgage brokers that specialise in financing loans for trusts.
Please contact us on 1300 889 743 or complete our free assessment form to find out which lenders will allow you to borrow for your trust.
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 can’t repay the loan.
Furthermore, 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 that most lenders don’t lend to trusts is because trust loans are less profitable to them as a result 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 as more experienced staff handle the loan. However, the customer is often charged a higher rate and more fees, making it more expensive to get their loan approved.
Business banking is slow, expensive, may not include a low doc option and tends to allow you to borrow far less than you can with a residential loan.
We know lenders with lower fees and competitive rates!
Please call us on 1300 889 743 or complete our free assessment form today!
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’s additional work to be completed 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’s possible to setup the loan to be in the name of the trustee or director of the trustee instead of being in the trust name.
For example, if John Smith is the director of ABC Pty Ltd, 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
Note that some banks don’t accept the second loan structure listed above.
Please talk to your accountant for tax advice regarding the different structures.
Fill in our free assessment form or call one of our brokers on 1300 889 743 to find out which lenders can help with your proposed loan structure.
Can I sell my property to my trust?
Yes, you can sell your current investment property to your own trust.
However, you may be required to pay stamp duty on the transfer as well as capital gains tax on any capital gain you have made since purchasing your investment property.
Are there low doc loans for trusts?
Yes, it’s 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’s critical that you talk to us on 1300 889 743 or complete our free assessment form before you apply for a low doc loan using a trust.
What is a trust?
A 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.
Benefits of buying property in a trust name
You may be able to reduce your tax bill by distributing income to family members with lower taxable income.
Trusts allow you to control and receive income from assets without having them in your name.
This may protect these assets in the event that you’re sued or you go through a divorce.
Some trusts may allow you to effectively pass assets on to future generations without paying excessive taxes or going through estate disputes.
Check out the trust information page for tips on investing using a trust.
Drawbacks of buying property in a trust name
No negative gearing
Well, you’ll see no immediate tax benefit at least.
In saying, you may be able to carry forward any losses you make from owning and managing the property and offset them again future profits.
A common strategy is to buy your first few investment properties in your own name in order to build up good equity and claim these negative gearing benefits from the Australian Taxation Office (ATO).
Later, you can switch ownership to a trust structure.
It’s essential you speak to your accountant before committing to an investment strategy.
Accounting fees are higher
Set-up costs and annual accounting fees can be higher when owning a property in a trust due to the added complexity of tax returns.
Mortgage structure is critical
This isn’t a drawback as much as it is a huge risk to be aware of.
Using a mortgage broker that has experience with trust loans will help you to get approved for finance that works for you.
They can also help you to “spread your risk” so your investment plans don’t breach mortgage exposure limits.
Do beneficiaries need to guarantee a loan for a trust?
In a typical trust loan arrangement, the trust company will be the borrower while the guarantor will be the director/s.
However, some lenders require all adult beneficiaries to be guarantors.
If beneficiaries are required to act as guarantors, you’ll need to:
- Submit evidence of your financial situation including asset and liabilities.
- Seek legal advice and sign agreements between yourself and the borrower.
- Provide full identification (ID), which is typically only required if you’re a 25% or more beneficial owner of the trust.
How do I know if I’m a beneficiary?
A trust deed will usually include a list of beneficiaries but with a discretionary trust it will simply state anyone who is a friend or family member of the sole beneficiary is also considered a beneficiary.
In this case, the beneficiary will be asked to act as a guarantor even if they are, for example, distributing money to their spouse for tax reduction purposes.
For a unit trust, it’s always clear who are the beneficiaries as they are clearly stated in the trust deed schedule.
Apply for a loan in a trust
Borrowing with a trust is possible!
At Home Loan Experts, we 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.
Please fill in our free assessment form or contact us on 1300 889 743 to speak to a mortgage broker who specialises in helping people to borrow money for their trust.