Factors Considered by Lenders
When a lender reviews a trust application, they conduct a comprehensive credit assessment to determine whether to approve the loan. The assessment typically focuses on various factors, including:
1. Trust Type: Different banks may have preferences for specific trust types. Some may favor discretionary or family trusts, while others are open to hybrid trusts, property investor trusts, or self-managed superannuation fund (SMSF) trusts.
2. Trust Credit File: It’s important to note that both the directors and beneficiaries of a trust possess credit files. Additionally, in some instances, trustee companies and trusts themselves have credit files. Banks examine these files for previous applications with other banks and any credit issues or blemishes.
3. Trust Deed: The trust deed serves to confirm the identities of beneficiaries and trustees. Lenders check the trust deed to ensure that the trustee has the authority to apply for loans on behalf of the trust.
4. Loan Structure: Many individuals opt to structure the loan in the name of the trustee or the director of the trustee company, rather than in the trust’s name. In this scenario, the director of the trustee company becomes the borrower, while the trust acts as the mortgagor. This approach is often chosen to maximize the benefits of negative gearing when utilizing unit or hybrid trusts.
5. Beneficiaries: It’s worth noting that some lenders may require all adult beneficiaries to act as guarantors for the loan. Given that most trusts have two, three, or more beneficiaries, these structures can potentially complicate the borrowing process.
Our team is well-versed in what lenders scrutinize when dealing with trusts. Feel free to contact us at 1300 401 847 or complete our free assessment form to connect with one of our experienced brokers today!
Additional Documentation Required by Lenders
To process a trust loan application, banks typically require various documents. These documents may include:
A certified copy of the stamped trust deed.
A certified copy of the company constitution, if a company acts as the trustee.
Identification documents for all trustees, directors of trustees, and beneficiaries associated with the trust.
Tax returns and notices of assessment for the trust. It’s important to note that these documents are not always necessary, particularly for low documentation (low doc) loans or for newly established trusts.
For a detailed list of the specific documents needed for your trust loan application, please reach out to us at 1300 401 847 or complete our free assessment form. Our team will provide you with the guidance and information required to meet the bank’s document requirements.
Accessing Discounted Trust Loans
Indeed, trusts can secure discounted loans with the right lender. The secret to approval lies in finding a lender familiar with your trust type and loan needs. Ensuring your loan is processed as residential, not commercial, can help avoid extra costs. Many lenders do not approve residential trust loans, making it essential to connect with experts like us who specialize in trust-based lending. Contact us at 1300 401 847 to explore discounted trust loans and streamline your investment property acquisition.
Trusts from a Lender’s Perspective
Trusts often pose additional complexity for Australian banks and lenders without corresponding benefits. The intricacies of trust applications, including legal considerations and extensive paperwork, can lead to delays and errors, exacerbated by many bank personnel’s limited understanding of trust mechanisms. Ambiguous credit policies further complicate the process, with some major banks unable to accommodate residential loans for trusts due to system limitations.
To overcome these challenges, major banks commonly refer trust-related inquiries to their business banking departments. While this approach benefits the bank with more experienced staff, it often results in higher rates and fees for customers. Business banking also tends to be slow, costly, may lack low documentation options, and generally restricts borrowing compared to residential loans.
We specialize in connecting borrowers with lenders offering competitive rates and lower fees for trust-based loans. Feel free to reach out to us at 1300 401 847 or complete our free assessment form to explore the options for borrowing within a trust structure.
Trust Loans: Fees and Loan Structure
Do Lenders Impose Extra Fees on Trust Loans?
Indeed, lenders typically charge additional fees for loans to trusts. These fees are justified since there’s extra work involved in preparing guarantee and indemnity documents that the trustee and beneficiaries (if applicable) must sign. Generally, these supplementary legal fees from the bank amount to around $200 to $500.
Can the Loan Be in My Name?
Absolutely, it is possible to structure the loan in your name, the trustee, or the director of the trustee, rather than the trust’s name. For example, if John Smith serves as the director of ABC Pty Ltd, acting as the trustee for The Smith Unit Trust, the loan can be set up in one of 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 certain banks may not accept the second loan structure described above. It’s advisable to consult your accountant for tax advice regarding these different structures. Feel free to reach out to one of our brokers at 1300 401 847 or complete our free assessment form to discover which lenders can assist with your preferred loan structure.
Is It Possible to Sell a Property to a Trust?
Yes, you can sell your current investment property to your own trust. However, be prepared to incur stamp duty on the transfer and capital gains tax on any appreciation in value since the property’s purchase.
Are Low Documentation (Low Doc) Loans Available for Trusts?
Certainly, you can secure approval for a low doc trust loan. A low doc loan allows you to declare your income instead of providing tax returns as income proof. It’s important to note that only a select few lenders consider low doc loans for trusts. Therefore, it’s crucial to get in touch with us at 1300 401 847 or complete our free assessment form before applying for a low doc loan involving a trust.
What Exactly Is a Trust?
A trust is a legal arrangement that enables a person or company to hold assets on behalf of another person, family, or a group of individuals, collectively known as beneficiaries. While beneficiaries own the assets, they are managed by a trustee, who can be either a company or an individual. The trustee’s actions are governed by a trust deed, outlining the rules they must follow and how profits are distributed among the beneficiaries.
Pros of Purchasing Property in a Trust
Tax Advantages
Owning property in a trust can lead to potential tax savings. You can distribute income to family members with lower taxable incomes, reducing your overall tax liability.
Asset Protection
Trusts allow you to manage and derive income from assets without having them in your own name. This arrangement can safeguard your assets in case of legal action or divorce.
Estate Planning
Certain trusts enable you to pass assets to future generations with reduced taxes and without the hassle of estate disputes.
Cons of Buying Property in a Trust
Limited Negative Gearing Benefits
Property held in a trust may not offer immediate negative gearing benefits. However, you can carry forward any losses from property ownership and offset them against future profits. Many investors start by owning a few properties in their name to build equity and claim negative gearing benefits. They may then transfer ownership to a trust. Consult your accountant before deciding on an investment strategy.
Higher Accounting Costs
The setup and ongoing accounting expenses for trust-owned properties are typically higher due to the added complexity of tax returns.
Critical Mortgage Structure
When dealing with trust loans, mortgage structure is crucial. It’s not so much a drawback as a significant consideration. Collaborating with an experienced mortgage broker in trust loans can help you secure financing that suits your needs and ensures your investment plans adhere to mortgage exposure limits.
Must Beneficiaries Guarantee Trust Loans?
In standard trust loan arrangements, the trust company is the borrower, and the director/s act as guarantors. However, some lenders may require all adult beneficiaries to serve as guarantors. If beneficiaries are needed as guarantors, you’ll have to:
- Provide financial information, including assets and liabilities.
- Seek legal advice and sign agreements between the beneficiaries and the borrower.
- Furnish full identification (ID), typically required for beneficiaries who own 25% or more of the trust.
How to Determine Beneficiary Status
A trust deed usually includes a list of beneficiaries. In the case of a discretionary trust, it may simply state that anyone who is a friend or family member of the sole beneficiary is considered a beneficiary. Even if a beneficiary is distributing funds to their spouse for tax purposes, they may still be required to act as guarantors. Unit trusts clearly state the beneficiaries in the trust deed schedule.
Applying for a Trust Loan
Securing a loan within a trust is feasible. At Home Loan Experts, we assist you in ensuring your trust loan meets all requirements for optimal investment returns. We are well-versed in trust structures and understand which lenders accept various trust types. Feel free to complete our free assessment form or contact us at 1300 401 847 to connect with a mortgage broker specializing in trust-related borrowing.
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