Trust Loans: Borrowing With A Trust

Many property investors choose to purchase real estate through a trust to take advantage of asset protection, tax benefits, and estate-planning flexibility. Unfortunately, most lenders don’t know how to structure trust loans correctly, which can result in the borrower missing out on these tax advantages.

Understanding how trust home loans work and which lenders support them can make all the difference in getting approved and maximising your investment returns.

What Is A Trust Home Loan?

A trust home loan is a mortgage taken out so a property can be owned by a trust, rather than an individual. The trust holds the legal title to the property, while the trustee (a person or company) manages it on behalf of the beneficiaries.

These types of loans are commonly used for investment properties, especially when buyers want greater control over asset distribution and taxation.

How Does A Trust Home Loan Work?

​A trust home loan allows a trust to borrow funds for purchasing or refinancing property, with the property title held in the trust’s name. This approach can offer benefits such as estate-planning advantages and asset protection. However, obtaining a home loan through a trust involves a series of steps and considerations distinct from traditional mortgage processes.

Below is a detailed explanation of how a trust home loan works:​

1. Establishing The Trust

Before a trust can acquire property, it must be properly established:​

• Create the Trust Document: Draft a legal document, often referred to as a trust deed, that outlines the terms of the trust, including the appointment of a trustee and the designation of beneficiaries.​
• Select the Trustee: Choose an individual or entity responsible for managing the trust’s assets and obligations.​
• Define Beneficiaries: Identify the individuals or entities who will benefit from the trust’s assets.​

Proper establishment of the trust is crucial, as it forms the legal foundation for all subsequent actions, including borrowing.​

2. Preparing For The Loan Application

Once the trust is established, preparation for the loan application involves:​

• Assessing the Trust’s Financial Position: Evaluate the trust’s assets, income, and liabilities to determine its borrowing capacity.​
• Gathering Necessary Documentation: Collect essential documents, such as the trust deed, financial statements, and identification for all involved parties.​

Thorough preparation ensures a smoother application process and demonstrates the trust’s creditworthiness to potential lenders.​

3. Identifying Suitable Lenders

Not all financial institutions offer loans to trusts, so it’s important to:​

• Research Lenders Experienced with Trusts: Identify lenders who specialise in or are familiar with trust lending.​
• Understand Lender Requirements: Be aware that lenders may have tougher terms for trust loans, including higher interest rates or additional conditions.​

Selecting the right lender is critical to securing favourable loan terms and ensuring they align with the trust’s objectives.​

4. Submitting The Loan Application

The formal application process includes:​

• Application by the Trustee: The trustee applies for the loan on behalf of the trust, providing all required documentation.​
• Creditworthiness Evaluation: The lender assesses the financial health of the trust and may also evaluate the credit histories of trustees and beneficiaries.

This step determines the trust’s eligibility for the loan and the terms that will be offered.​

5. Addressing Guarantor Obligations

Lenders often require additional security:​

• Guarantor Requirements: Trustees and, in some cases, beneficiaries may need to act as guarantors, making them personally liable if the trust defaults.​
• Legal Implications: It’s essential to understand the responsibilities and potential risks associated with being a guarantor.​

Clear comprehension of guarantor obligations helps in making informed decisions and preparing for potential liabilities.​

6. Loan Approval And Property Acquisition

Upon meeting the lender’s criteria:​

• Receive Loan Approval: The lender issues an approval, detailing the loan amount, interest rate, and repayment terms.​
• Finalise Property Purchase or Refinance: Use the loan funds to complete the property transaction, ensuring the title is registered in the trust’s name.​

This phase culminates in the trust acquiring or refinancing the property as intended.​

7. Ongoing Loan And Trust Management

Post-acquisition responsibilities include:​

• Adhering to Repayment Terms: Ensure timely loan repayments, as agreed upon with the lender.​
• Maintaining Compliance: Regularly review and comply with both the trust’s terms and the lender’s requirements to avoid legal or financial complications.​

Effective management ensures the trust remains in good standing and fulfils its obligations.​

What Are The Pros And Cons Of Trust Home Loans?

Investing in property through a family trust is a strategy many Australians employ, seeking benefits such as asset protection and tax flexibility. However, it’s essential to weigh these advantages against potential drawbacks to determine if this approach aligns with your financial goals.

Pros

• Tax Benefits: Family trusts offer tax planning opportunities. The trustee has the discretion to distribute income generated from the investment property to beneficiaries in lower tax brackets, thereby reducing the overall tax liability. Additionally, if the trust holds the property for more than 12 months, it may be eligible for a 50% capital gains tax discount upon sale.
• Asset Protection: Holding property within a family trust can safeguard assets from personal creditors. Since the property is legally owned by the trust, it is generally protected in the event of bankruptcy or legal action against an individual beneficiary.
• Estate Planning: A family trust facilitates smoother estate planning by allowing assets to be passed on to future generations without incurring capital gains tax or stamp duty. This structure helps minimise disputes and legal complications associated with asset distribution. Check out the trust information page for tips on investing using a trust.

Cons

• Limited Lender Options: Not all financial institutions are willing to lend to trusts due to the complex legal structures involved. This limitation can make it challenging to secure financing, and those lenders that do offer loans to trusts may impose stricter borrowing conditions.
• Complex Process: Establishing and managing a family trust involves intricate legal and administrative procedures. The trustee is responsible for adhering to the trust deed, distributing income appropriately, and maintaining compliance with tax obligations, which can be time-consuming and require professional assistance.
• Extra Fees: Setting up a family trust incurs initial costs, including legal and accounting fees. Additionally, there are ongoing administrative expenses to ensure the trust remains compliant with legal and tax requirements. These costs can accumulate over time, so it’s important to assess whether the benefits outweigh the expenses.
• Guarantor Requirements: Some lenders may require beneficiaries to act as guarantors for loans taken out by the trust. This requirement can complicate the borrowing process and potentially expose beneficiaries to financial risk if the trust defaults on the loan.
• Negative Gearing Limitations: Unlike individual property ownership, where losses can be offset against other personal income, trusts cannot distribute losses to beneficiaries. Any losses incurred are retained within the trust and can be offset only against future income or gains generated by the trust, which may limit immediate tax benefits.
• Land Tax Implications: In certain Australian states, properties held within a family trust may not be eligible for land tax-free thresholds, leading to higher land tax liabilities, compared with properties owned personally. It’s crucial to understand the specific land tax regulations in your state before proceeding.

Before deciding to invest in property through a family trust, it’s advisable to consult with financial and legal professionals to fully understand the implications and ensure this strategy aligns with your overall financial plan.

Who Can Qualify For A Trust Home Loan?

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 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.

You’ll need to prepare several key documents. These are what lenders typically require to process a trust home loan:

• 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, particularly for low-doc or for new trusts).

We know what the banks look for when it comes to trusts! Please call us on 1300 889 743 or complete our free online assessment form to speak with one of our brokers today.

Types Of Home Loans For Trusts