What Do Lenders Consider When Evaluating Trust Applications?
When a lender receives a trust application, they conduct a comprehensive credit assessment to determine loan approval. During this assessment, several factors are typically considered, including:
- Trust Type: Lenders have varying preferences for the types of trusts they accept. Some prefer discretionary or family trusts, while others are open to hybrid, property investor, and self-managed superannuation fund (SMSF) trusts.
- Trust Credit File: Beyond the credit files of directors and beneficiaries, trustee companies, and, in some cases, trusts themselves have credit files. These files are reviewed by banks to check for previous applications to other lenders and any credit history issues.
- Trust Deed: The trust deed specifies the beneficiaries and trustees. Lenders examine the deed to ensure that the trustee has the authority to apply for loans on behalf of the trust.
- Loan Structure: Some borrowers choose to have the loan in the name of the trustee or the director of the trustee company, rather than in the trust’s name. This structure is utilized to benefit from negative gearing advantages, especially with unit or hybrid trusts.
- Beneficiaries: In certain cases, lenders may require all adult beneficiaries to act as guarantors. This can pose challenges for trusts with multiple beneficiaries.
We have a deep understanding of what lenders look for in trust applications. To learn more or discuss your specific situation, please contact us at 1300 889 743 or complete our free assessment form to connect with one of our experienced brokers today!
What Additional Documentation Is Required By Banks?
To process a loan for a trust, banks typically request several additional documents from applicants. These documents include:
- A certified copy of the stamped trust deed.
- A certified copy of the company constitution, if a company serves as the trustee.
- Identification documents for all trustees, directors of trustees, and beneficiaries of the trust.
- Tax returns and notices of assessment for the trust, although these may not always be necessary, especially for low doc loans or new trusts.
For a detailed list of the specific documents required for your trust application, please contact us. Our experts can provide you with guidance tailored to your unique circumstances..
Can Trusts Qualify For Discounted Loans?
Certainly! The key to securing loan approval for trusts is understanding which lender can accommodate your specific trust type and the intended loan amount. It is crucial to ensure that the lender categorizes your loan as a residential loan rather than a commercial loan. This way, you can avoid additional fees and higher interest rates.
Furthermore, many lenders are unable to grant residential loans for trusts, leaving individuals in search of options for purchasing investment properties through a trust structure.
How Lenders Perceive Trusts
In Australia, banks and other lenders often view trust applications as additional work without commensurate rewards. Trust applications are inherently complex, requiring consideration of legal issues and extensive paperwork, making them challenging for approval.
The majority of bank managers, mortgage brokers, and credit staff have limited understanding of how trusts operate. Consequently, trust applications frequently get passed between different bank departments, leading to delays and mistakes. Some bank managers are not even certain if their own bank offers trust loans because many banks have unclear credit policies.
For instance, one of the major banks in Australia is unable to provide residential loans for trusts because their computer system is ill-equipped to process them.
We are mortgage brokers with a specialization in facilitating trust loans.
Why Not All Banks Provide Trust Loans
Not all banks offer loans to trusts for several reasons. Some banks are concerned that loans to certain trust types might be legally unenforceable if the borrower cannot meet their repayment obligations.
Additionally, lenders worry that changes in taxation rulings by the Australian Taxation Office (ATO) could impact the borrowers to whom they have lent money.
A primary reason many lenders avoid trust loans is that they are less profitable due to the additional work required to prepare mortgage documents and verify the trust deed.
How Banks Handle Trust Loans
Major banks usually refer most trust-related loan inquiries to their business banking department, where more experienced staff handle the loan. However, this approach often results in customers paying higher interest rates and additional fees, making it more costly to secure loan approval.
Business banking tends to be slower, more expensive, may not offer low doc options, and usually provides lower borrowing limits compared to residential loans. We can connect you with lenders that offer lower fees and competitive rates for trust loans
Do Lenders Charge Additional Fees For Trust Loans?
Yes, lenders typically charge additional fees for trust loans. This is because there is extra work involved in preparing the guarantee and indemnity documents for the trustee and beneficiaries (if applicable) to sign. The additional legal fees charged by the bank usually range from $200 to $500 in most cases.
Can The Loan Be In My Name?
Yes, you can set up the loan in the name of the trustee or director of the trustee, rather than in the trust’s name. For example, if you are the director of ABC Pty Ltd, the trustee for The Smith Unit Trust, the loan can be structured in 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
Please note that not all banks accept the second loan structure. It’s advisable to consult with your accountant for tax advice on the different structures.
Is It Possible To Transfer Ownership Of My Investment Property To My Trust?
Indeed, you can transfer your current investment property to your trust. Nevertheless, you might need to cover the costs of stamp duty during the transfer, as well as address potential capital gains tax obligations related to any profits accrued since your initial purchase of the investment property.
Can Low Doc Loans Be Obtained For Trusts?
Yes, you can potentially secure approval for a low doc trust loan. With a low doc loan, you can state your income instead of having to furnish tax returns as evidence of your earnings. However, it’s crucial to note that only a limited number of lenders are willing to entertain low doc loan applications for trusts. Thus, it’s highly advisable to reach out to us at (03) 6144 9669, (03) 6358 2025 for guidance before you initiate a low doc loan application involving a trust.
What Constitutes A Trust?
A trust is a legal structure that enables an individual or an entity to possess assets in the interests of another individual, a family, or a collective group of individuals, referred to as the beneficiaries of the trust.
While the beneficiaries have ownership rights over the assets, the administration and control of these assets are vested in a trustee. The trustee can take the form of either an individual or a company.
The trustee’s actions and responsibilities are determined by a trust deed, a legal document outlining the guidelines and regulations that the trustee must adhere to. Additionally, the trust deed specifies the procedures for distributing profits to the beneficiaries.
Disadvantages Of Purchasing Property In A Trust’s Name
No immediate negative gearing benefits
Acquiring a property under a trust name may not provide immediate tax advantages. Nonetheless, it is possible to carry forward any losses incurred from property ownership and management to offset future profits. Some individuals opt for an initial investment in their own name to accumulate equity and claim negative gearing benefits from the Australian Taxation Office (ATO) before transferring ownership to a trust structure. It is strongly recommended that you consult with your accountant before finalizing your investment strategy.
Higher accounting expenses
The intricacies involved in tax returns can result in higher set-up and annual accounting costs when owning a property within a trust structure.
Crucial mortgage structure considerations
Effectively structuring your mortgage is not so much a drawback as it is a vital aspect to consider. Engaging a mortgage broker experienced in trust loans can assist you in securing suitable financing. They can also help diversify your investments to prevent breaching mortgage exposure limits, reducing potential risks to your investment plans.
Do Beneficiaries Need To Guarantee A Trust Loan?
In a typical trust loan arrangement, the borrower is the trust company, with the guarantor typically being the director(s).
However, certain lenders may require that all adult beneficiaries act as guarantors.
If beneficiaries are called upon to serve as guarantors, the following steps are usually required:
- Provide proof of your financial position, which includes assets and liabilities.
- Seek legal counsel and execute agreements between yourself and the borrower.
- Furnish complete identification (ID), which is generally necessary if you are a beneficial owner of the trust with a stake of 25% or more.
How can I determine if I am a beneficiary?
A trust deed generally contains a list of beneficiaries. In the case of a discretionary trust, the deed typically defines beneficiaries as anyone who is a friend or family member of the sole beneficiary. This means that even if the beneficiary is distributing funds to their spouse for the purpose of reducing taxes, the spouse will still be asked to serve as a guarantor. In the case of a unit trust, the trust deed schedule clearly identifies the beneficiaries.