There are two main reasons why you can use a trust to buy an investment property – getting tax benefits and asset protection. However most financial institutions do not know how to structure these loans and as a result, you could lose the tax benefit on your trust loan. Yet there are some lenders who do offer these loans.
Therefore, it is very important to know the following when you borrow with a trust:
What is the Lender’s Requirement for Loan Approval?
Once lenders receive trust loan applications, they carry out credit assessment in order to find out whether they can approve the loan. The following are some of the lender’s requirements for loan approval:
Type – Lender undertakes the assessment process based on the types of trusts. There are some financial institutions that prefer a family trust while others tend to choose discretionary trusts. Some banks also go for hybrid or self-managed superannuation fund trusts (SMSF).
Credit File of the Trust – Banks also assess the credit files of trust. Most of these firms maintain a credit file and some beneficiaries or directors also maintain such files. They can submit these files along with the loan application for assessment purposes.
Beneficiaries – One of the requirements of lender’s institutions is that they want adult beneficiaries to act as guarantor. The number of beneficiaries varies in different trusts. Some of them have two while others have more than three or four beneficiaries. The different structure is another reason why it becomes difficult for trusts to take out a loan too.
Loan Structure – Individuals often prefer to apply for a loan in the name of a director or a trustee instead of applying in the name of a trust. The purpose of doing this is to avail negative gearing benefits, especially in case of hybrid or unit trust.
Trust Deed – Through using a trust deed, banks identify trustees and beneficiaries for these companies. The deed enables a lender to evaluate whether beneficiaries or trustees are in a position to borrow.
Below is a list of additional documents that lenders need in order to process a trust loan.
- Identification documents of beneficiaries, directors
- Tax returns
- In case of a trustee of a firm, a certified copy of a constitution
- A certified copy of a trust deed
- In some cases, such as new trusts or low doc, banks also need an assessment notice for a trust
Possibility of Discounted Loans
It is possible to get a discount on your loan as well. But it shouldn’t be processed as a commercial loan and instead as a residential loan, or else you will end up paying a higher interest rate and additional fees. Therefore, it’s important to know which bank you can work with in order to get that advantage.
Trust Loans – Lender’s Perspective
In Australia, banks and other financial institutions consider it a hectic task to issue loans to a trust, because of the complexity of trust loan applications. Mortgage brokers, bank managers and staff dealing with credit find it hard to understand the mechanism of these loans. On top of that, extensive documentation and legal matters make it even more difficult to process these loans.
Additional Fee Linked with a Trust Loan
Every bank charges an additional fee when they lend money to a trust due to additional work in relation to indemnity documents and guarantee preparation. Lenders prepare the documents to get signatures of trustees of a company.Therefore, when applying for a trust loan, it’s important to take all of these factors into account.
If you would like more information about borrowing with a trust, speak with our team of mortgage experts on 1300 088 065 or email Nathan.Vecchio@HunterGalloway.com.au