Are you thinking of using a trust loan to invest in property? Learn about the advantages of trust loans and what you can expect from the application process.
What Is a Trust Loan?
Trusts are used to help protect assets and to reduce tax obligations. There are different types of trusts but they all essentially serve as an arrangement that allows an individual or company to own assets for designated beneficiaries. The trustee, or trust holder, controls the trust to the extent the agreement allows, but the assets are intended for the beneficiaries.
With a trust loan, the trust is taking out the mortgage. The loan can be either in the name of the trustee or the trust itself. As you can imagine, trust loans can get complicated, especially when there are a large number of beneficiaries. There are also different ways to structure a trust loan and different approaches to financing loans through a trust.
Do Lenders Encourage Trust Loans?
Because of the complexity of trust loans, most lenders aren’t that interested in competing for trust loan customers. Not only is there more paperwork involved during the application process, but there are also legal issues that need to be addressed and there is more room for error as a trust loan application goes between different departments at the bank.
In order to experience a smoother process, you may want to apply with a lender that specialises in trust loans. This way, your loan application will be processed faster. You’ll also be more likely to get a competitive interest rate.
What Types of Trusts Can Qualify for Home Loan Financing?
There are different types of trusts you can finance a property investment through:
Family Trust Loans
With a family trust, all the beneficiaries are related and the appointed trustee has control over how the assets are distributed. A lot of banks won’t accept family trust applications. Of those who will, many expect each adult beneficiary to act as a guarantor. This means each adult beneficiary must be a part of the loan application process.
However, there are some non-conforming lenders who are more flexible with family trust loans and who won’t insist on each beneficiary guaranteeing the loan.
You can talk to one of our trust loan experts today to learn more about which lenders are currently willing to finance trust loans and have flexible lending criteria. Call us on (07) 3146 5732today.
Discretionary Trust Loans
For those banks who will approve a discretionary trust loan – about half of Australian lenders will – you’ll usually be referred to their business banking department. This can make it harder to get a competitive loan. As with family trust loans, if possible, apply with a lender that is set up for trust loans.
In order to qualify for a trust loan from your self-managed super fun, the bank will check to make sure the current income from the trust, combined with the expected rental income, will be enough to service the loan.
Company Trust Loans
With a company trust loan, you would be financing a property in the name of the company that’s acting as the trustee. In this situation, some lenders will expect all shareholders to acts as loan guarantors. As with other types of trust loans, depending on the lender you apply with, you may end up being referred to business banking.
Unit trusts are a little different than other types of trusts in that there are unit holders rather than traditional beneficiaries. Instead of the trustee deciding how to distribute the income from the trust, the number of units a holder has dictates the percentage of the income they receive. With unit trust loans, you can decide to put the loan in your name if you are the trustee, which can simplify the application process.
Hybrid trusts are like family trusts but they incorporate features of a unit trust. There are a very limited number of lenders in Australia you can apply to with a hybrid trust.
No matter which type of trust you have, in order to qualify for a competitive loan, finding a lender that’s set up for this type of mortgage financing is step number one. Otherwise, you are more likely to have your application denied or to end up with an even more complicated loan.
How Do Banks Assess Trust Loan Applications?
There are more factors involved with trust loans that there are with standard home loans. Before assessing the trust’s borrowing capacity, lenders will first have to check the type of trust, the credit file of the trust (yes trusts have credit files just like individuals!), and if the deed states that the trustee has the authority to apply for a loan for the trust.
Banks will also require additional documentation so they can evaluate the trust. These documents include:
- Identification for all the beneficiaries and directors, as well as the trustee.
- A certified copy of the trust deed.
- If there is a company acting as the trustee, you’ll also need a certified copy of the company constitution.
- For some trust applications, you’ll need to include the trust’s tax returns for the past two years, as well as notices of assessment.
- If the lender wants all the adult beneficiaries to act as guarantors for the loan, the bank will request more financial documentation from each individual as well.
Are There Extra Fees Associated with Trust Loans?
Because of the extra work involved, as well as legal costs, all lenders are going to charge extra fees for trust loans. The reality is, a greater number of documents need to be prepared and there are more steps involved in the application process. While these fees aren’t generally large enough to make a trust loan not worthwhile, it’s always helpful to know what costs to expect. For example, standard legal fees your bank may charge for a trust loan application will range from $300 to $500.
Why Don’t All Banks Offer Trust Loans?
For banks, the issue with trust loans isn’t just the complicated loan structure and the extra paperwork. Another problem is the risk involved if you default on the mortgage.
If the borrower can no longer repay the loan, there’s the worry that the contract won’t be easily enforceable for some types of trusts. When the trust name is on the loan, not your name, there may be more hoops the bank will have to go through to settle everything after a default, making the process more expensive for them. Also, if the Australian Taxation Office amends any of the taxation rules regarding trusts in the future, this could impact borrowers, possibly changing the tax advantages of taking out a trust loan in the first place!
Banks don’t like to deal with a lot of uncontrollable factors. In the case of a trust loan, there are simply more factors involved that could influence the loan than there are with traditional loans, which means there’s more of a chance the bank will have to incur legal fees or use up more of their own resources to deal with the loan.
With if a Lender Refers You to Their Business Banking Department?
You may want to consider looking for a lender that specialises in trust loans instead of applying through the business banking department of a major bank. Here’s why:
- You probably won’t have a low doc loan option when you apply through the business banking department.
- You won’t be able to borrow as much with a business loan as you could with a residential loan.
- Traditionally, business loans come with higher fees.
- Overall, the process will likely be a lot slower.
What if I Need a Low Doc Trust Loan?
Depending on what documentation you have to use for income verification, you may need a low doc loan when you apply for a trust loan. With a low doc loan, you’ll still need to prove your income but you won’t have to use the standard two years’ worth of tax returns to verify your income.
Low doc trust loans are out there, but, as you may have guessed, there aren’t a lot of lenders that will consider them. Call us on (07) 3146 5732 today or fill out our online enquiry form and we can talk with you about your options.
The Pros and Cons of Using Trust Loans
When you buy a property with a trust, it’s the trust arrangement that takes out the mortgage, not an individual. Because of this, the trust serves as a sort of personal financial buffer. You can be the official ‘trustee,’ which allows you to make decisions as long as you follow the rules in the trust deed, but the property is in the name of the trust.
Doing this offers more flexibility over the assets held in the trust, as well as some financial protection.
Benefits of trust loans
These are the primary reasons people put their assets in a trust:
- Shield your assets. The investment income that comes from the trust doesn’t have to be in your name. So, if you want to protect your assets, such as during a divorce or if you are sued, a trust will let you protect the earned income.
- Lower your tax bill. One of the most common reasons people buy property in the name of their trust is to reduce their tax bill. With a trust, you can distribute income from your assets to the other trust beneficiaries who may have a lower taxable income, such as your children.
- Reduce estate taxes. Another reason people use trusts is for estate planning. You can talk to a financial advisor about which types of trusts will allow you to minimise the tax burden when your assets are passed on to your children or other inheritors. Using a trust for estate planning can also eliminate any estate disputes.
Disadvantages of trust loans
There are a couple of important potential downsides to keep in mind when buying a property through a trust.
- You may have more fees to deal with. You’ll pay more in accounting fees every year because your tax returns will be more complex. The mortgage set up fees are also higher.
- You miss out on negative gearing benefits. If you were planning on using negative gearing to reduce your tax obligations as part of your investment strategy, you may run into problems with a trust loan. Be sure to talk to your accountant or financial advisor about setting up the right investment strategy for you.
How to Apply for a Trust Loan
Trust loans can be a useful tool for helping you and your beneficiaries get more out of your property investment strategy. But, there are a lot of factors that go into optimising your loan and the benefits that come with trust loans.
With years of experience helping borrowers get the loan they want when buying through a trust, we can help you throughout the process. Contact us here for a free assessment or call us on (07) 3146 5732 and talk to one of our mortgage specialists about your trust loan.