Borrowing with a Trust; Everything You Need to Know

By 22 March 2018Education
borrow with a trust

Some prefer to invest in properties through trust, because it offers tax incentive and also protects the assets. But most banks don’t know how to structure these loans properly, and as a result, you may miss out on the tax benefit.

What do Lenders Look for?

Banks carry out credit assessment for loan approval when they receive a trust application. While assessing the application, they normally look for the following:

  • Loan Structure – Instead of taking a loan in the name of a trust, most people prefer to take it in the name of a trustee or the director of a trustee firm. In such an agreement, trust is a mortgagor and director is a borrower. The reason behind that is to take benefit of the negative gearing, especially when using a hybrid or unit trust.
  • Trust Deed – This deed allows a lender to identify the actual trustees and beneficiaries. It also enables banks to find out whether a trustee can apply for a loan or not.
  • Beneficiaries – Some financial institutions require all adult beneficiaries of the trust to be guarantors. A trust usually has two or more beneficiaries, which makes it hard to borrow a loan.
  • Trust Credit File – All the beneficiaries and directors of a trust have credit files, but in some cases, trusts and trustee companies also maintain a credit file. Banks inspect the credit file against applications to identify the faults and also carry out checks with other banks.
  • Type of Trust – Lenders also assess trusts on the basis of their types. Some prefer family or discretionary trusts, while others go with self-managed superannuation fund, property investor, and hybrid trusts.

What Additional Documents Do Lenders Need?

The bank requires a number of documents to be submitted along with the trust loan application. This includes:

  • Tax returns
  • Identification of all the beneficiaries, directors and trustees
  • In case of a company trustee, a certified copy of the constitution
  • A certified copy of a stamped trust deed
  • An assessment notice for the trust

Can Trusts Avail Discounts on Loans?

Yes. You can save a lot in fees or higher interest rate if the lender processes the loan as a residential loan. If, however, they approve it as a commercial loan, you might have to bear the burden of high-interest rate and additional fee. Please note that there are so many banks that do not approve it as a residential loan, which makes it hard for a trust to buy an investment property.

It is very important to find a lender who works with your type of trust and is willing to work with your proposed loan amount.

Types of Trusts Eligible for Loan

Types of trusts that are used to buy investment property include,

  • Service trust
  • Self-managed superannuation fund trust
  • Property investment trust
  • Hybrid trust
  • Unit trust
  • Family trust
  • Discretionary trust

To apply for a home loan, you can use all of the above trust. But there are only a few banks that are willing to approve these loans. It is generally hard to lend money to trusts with corporate/company trustees or hybrid trusts.

Trusts from the Lender’s View Point

Often financial institutions in Australia view trusts as extra work that doesn’t come with any added rewards. This is because trust applications are very complex in nature. It requires detailed paperwork to approve the loan and banks have to deal with legal issues as well.

Most credit staff, mortgage brokers, and lenders do not know the working mechanism of trusts. This is why the trust application keeps rotating between different departments of a bank and is prone to errors and delay. Moreover, managers are mostly unaware of whether their bank accepts trust applications or not; this is due to unclear credit policies.

Some banks do not lend to trusts, because they believe that such a loan cannot be legally enforceable if a borrower is unable to pay the loan. They also worry about the fact that Australian tax office (ATO) may change the rulings about trusts, which would eventually affect the individuals they give loans to.

Last but not the least, lenders believe that trusts are not very profitable in comparison with the work they have to carry out in checking the trust deed and preparing mortgage documents. This is why they charge additional fees for giving loans to the trust. The legal charges of bank vary between $200 and $500.

Advantages of Buying Property in the Name of a Trust

There are a number of benefits when it comes to buying property in the trust’s name. For example, by dividing income to family members who have a lower taxable income, you won’t have to pay high tax bills. Besides, a trust enables you to receive and control income from asset even if they are not in your name. It will protect the asset, especially in instances, such as divorce or if the other party sue you.

There are some lenders who also allow you to pass your property to future generation without paying extra tax or getting into disputes related to real estate. You can also sell the investment property to your trust. However, you might have to pay tax on any capital gain and would also have to pay the stamp duty on the transfer.

It is very important to be aware of all the details if you wish to borrow home loan with a trust as it will enable you to take a well-informed decision.