Trusts - Does it buying in a trust really increase borrowing capacity?

Hi All,

I have been reading and speaking to people about buying investment property in a trust.

The common advice i have been given is creating a dormant / empty company, which will become the trustee of my trust.

In the above example, I can be the director of my dormant / empty company, and my dormant /empty company can be the trustee of my trust. The method maximises your asset protect and keeps you in control of your trust.

In terms of buying property in your trust, your trustee (which in the company for which i’m the director), guarantees the loan. Hence, I, the director need to proof that i can finance the loan on behalf of the trust.

My question is now, seeing as though the mortgage is under the trust, but my company (myself), guarantees the loan, does this affect my borrowing capacity for the next mortgage? Because, technically the mortgage is not in my personal name, I’m only standing as guarantee, hence my exposure might go unnoticed?

My next question is that my wife and i would like to use both our income as this will increase borrowing capacity. If this is the case, does this mean that both my wife and I need to be directors of the trustee company? If this was the case, is this a safe method in terms of asset protect as well as if things went sour in the relationship (obviously thinking of worse case scenario) and could we both guarantee the loan?

Lastly, if i was the sole director of the trustee company and i should pass away, who controls the trust? I guess i would need a will in place to nominate a new director of the trustee company, hence they would then control the trust?

It would be great to hear from guys who are very knowledgeable on trusts, those who actively use trusts as their IP holding structure as well as mortgage brokers who provide finance for clients buying in trusts.

Look forward to hearing from you.

Regards,
Robbie

Robbiep said:

My question is now, seeing as though the mortgage is under the trust, but my company (myself), guarantees the loan, does this affect my borrowing capacity for the next mortgage? Because, technically the mortgage is not in my personal name, I’m only standing as guarantee, hence my exposure might go unnoticed?

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Hi Robbiep,

I dont know who you been speaking too....but ....

You still need to declare every loan you guarantee, it's one of the questions on the loan form.

If such a simple "loop hole" exist, our banking system would be in so much trouble ...as it takes few $$ to set up a trust only

Regards
Michael

Thanks Mike, so in the banks eyes, being the gaurentor of the loan v holding the loan is pretty much the same in all banks eyes?

My question regarding having two directors (wife and myself), would it be fairly easy to use both our income when apply for a loan on behalf of the trust?

Robbiep said:

Thanks Mike, so in the banks eyes, being the gaurentor of the loan v holding the loan is pretty much the same in all banks eyes?

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Yep.

Robbiep said:

My question regarding having two directors (wife and myself), would it be fairly easy to use both our income when apply for a loan on behalf of the trust?

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Depends on the bank; some banks require the guarantor to be either the director, trustee or beneficiaries. Some like AMP is ok for de-facto and partners to be guarantor.

Sorry to say it depends on the bank and type of trust as well.

Regards
Michael

Thanks Mike, based on your feedback there is actually no added benefit, in terms of borrowing capacity, if buying in a trust?

When applying for finance in a trust, is it as straght forward as if you were buying in your personal name?

Robbiep said:

Thanks Mike, based on your feedback there is actually no added benefit, in terms of borrowing capacity, if buying in a trust?

When applying for finance in a trust, is it as straght forward as if you were buying in your personal name?

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borrowing capacity - no, so don't set up a trust if your main purpose is to "increase borrowing capacity".

Most trust are straight forward, in fact when applying for finance we use the same form, questions and products - but it will all depend on trust type and structure as well....i seen some very complex structure and trust- where a turst is owned by a company, and that company is owned by another company etc...

Regards
Michael

Would a trust, controlled by a trustee company (for which I'm the director) be classified as complex?

Robbiep you have been talking to the wrong people. A trust does not increase borrowing capacity at all. In fact, it makes it harder for you to borrow money because of the additional legal fees involved, additional scrutiny, and the simple fact that lots of lenders don't even consider lending to trusts.

Personal Name = Very Easy
Company Name = Pretty Easy
Trust = Ranges from not-so-easy to bloody hard

As Mick said - Guarantee = Loan for the purposes of servicing.

what the others said pretty much.

there are one or 2 loopholes there, as some lenders dont want to know about your business / co borrowings, and will ignore the guarantees etc

One of those is westpac (usually) ..............but gee, this is NOT a good strategy to go fwd on..........it relies on hope.

t
arolf

I have also heard of people using this strategy to build large portfolios that they wouldn't have been able to otherwise.

I have been advised that banks normally start to look at you differently when you have a large number of loans in your own name, but setting up numerous trust structures avoids this issue.

mattnz said:

I have also heard of people using this strategy to build large portfolios that they wouldn't have been able to otherwise.

I have been advised that banks normally start to look at you differently when you have a large number of loans in your own name, but setting up numerous trust structures avoids this issue.

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Have you heard of ppl build large portfolio buying using their personal name/ standard lending?


Don't believe everything you hear to the T; ppl will usually never tell you in details the "bad" exp they have and the issues ....

Not saying it's a bad strategy, in fact only last year i have started to buy IP under a trust structure ; for personal reason and asset protection + Land tax.

Speak to an accountant and get the right information so you can make a decision if this is the right path to take now or later .

Regards
Michael

mattnz said:

I have also heard of people using this strategy to build large portfolios that they wouldn't have been able to otherwise.

I have been advised that banks normally start to look at you differently when you have a large number of loans in your own name, but setting up numerous trust structures avoids this issue.

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Nah that's rubbish. When you go for any loan application the banks will:

a) Know what companies you are director of through a simple CRA/ASIC search
b) Ask you about it
c) May ask for the financials of those companies
d) Ask you what guarantees you have provided and you must sign a statutory declaration about those guarantees.

Banks will get nervous when you have lots of loans, regardless of how you've structured it. Banks always look through the corporate/trust veil anyway when assessing your capacity to borrow.

Plus - when you get big enough, you don't generally deal with the residential bank anymore. You will deal with the commercial side - which is a whole different ballpark altogether...as servicing becomes less important, and reputation/cashflow/security is what is counted.

Borrowing through a trust generally reduces your affordability for the simple fact that with the exception of the HDT, trusts can't negatively gear. Lenders won't use negative gearing addbacks, which reduces the available cashflow, which reduces affordability.

Trusts aren't a big deal when it comes to finance as long as the person you're dealing with has a good understanding of how trusts work. There are a few additional costs invovled and things do take a little longer.

It's no big deal to use your wife's income for any type of purchase even if she's not on the title, a director, etc. Being married brings an obvious interest in the property regarless of what the documentation says.

Rolft - how is this strategy not good or replying on hope? The worst case scenario is that the bank will take guarantees into consideration and, at worst, you have the same borrowing capacity as if buying in your own name.

Mick C – you mentioned you recently started buying property in a trust. One of these reasons was for land tax. Isnt this a reason not to buy in a trust as land tax is a flat rate of 1.6%, irrespective if its under the threshold?

PT Bear – If the plan is to only buy positive cash flow property, then you not too concerned about negative gearing. If I am a director of a company, and my company is the trustee of the trust, could my wife’s income still be used in the finance application when buying in a trust even though she is not part of the company?

Which leads me to my next question.. Can you have multiple guarantors per finance application? i.e. myself (director) and my wife (no connection to the company)?

Robbiep said:

Which leads me to my next question.. Can you have multiple guarantors per finance application? i.e. myself (director) and my wife (no connection to the company)?

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Banks generally do not like 3rd party guarantees (i.e. guarantees from people who no financial interest in the deal). But your wife would be an OK guarantor because of the simple fact that she is your wife.

Hi Robbie

You have to carefully plan succession of a trust because trust assets do not form part of your estate on death.

You have to be especially careful with having a company as trustee, especially if you are the sole director and shareholder. Once you die the company won't be able to operate until probate is granted. This could be 6 months after death. At this stage your personal representative under your will can take over the running of the company while your estate is wound up.

If you personally owned the shares then they would pass in accordance with your will or the intestacy rules if no will. The shareholders will then be able to select a new director who can then control the company and therefore the trust.

But, control of the trust really lies with the appointor of the trust. You should therefore make sure you have back up appointors under your trust deed. The new appointor can then keep the original trustee or sack the trustee and appoint a new one.

What you have to be careful of is someone taking control of the trust and distributing the entire trust assets to themselves before the new appointor realises they have the power to prevent this.

As for the borrowing cap issues - You must also consider future borrowings. You may not want to have your wife on now as a guarantor when you can service yourself. This would be just wasting her borrowing capacity and doubling the risk by giving another guarantee needlessly.

Another strategy may be to set up a trust with yourself guaranteeing the loans and then down the track another trust with her guaranteeing. This would reduce risk in 2 ways:
1. If a property falls over then only one of you would be hit.
2. If a tenant sues the trust then only one trust and its assets will be at risk.

Even if your wife is not part of the trustee company her income could usually be taken into account for servicing - if she gives a guarantee. This is because you are spouses. She would also be a beneficiary of the trust.

If a lender where to refuse this then it would be easily rectified by adding her as a shareholder to the trustee.

Robbiep said:

Rolf - how is this strategy not good or replying on hope? The worst case scenario is that the bank will take guarantees into consideration and, at worst, you have the same borrowing capacity as if buying in your own name.

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Its generally not a good strategy to submit an application when there's a high probably of rejection. Extra enquiries on your credit report can mean future legitmate applications are rejected out of hand.

Real Estate agents do talk to each other. If you make a bunch of offers in a particular area and your applications start getting rejected, the agents will stop taking your offers seriously.

Brokers and bankers aren't keen to submit applicaitons which get rejected. Not many people would be willing to show up to work if at the end of the week the boss reviewed their work and decided if it was worth paying them for it. Believe it or not, but many of the brokers on this forum also talk to each other.

If you're in a position where you need to rely on this tiny and unreliable loophole with a very limited number of lenders, you probably need to re-assess your strtategy.

Robbiep said:

Mick C – you mentioned you recently started buying property in a trust. One of these reasons was for land tax. Isnt this a reason not to buy in a trust as land tax is a flat rate of 1.6%, irrespective if its under the threshold?

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Land tax rates and rules vary state to state. By splitting up properties across different holding entities, you may find the total bill is less across multiple entities than if all the properties in that state are held in a single entity, irrespective of the intial thresholds.

Robbiep said:

PT Bear – If the plan is to only buy positive cash flow property, then you not too concerned about negative gearing. If I am a director of a company, and my company is the trustee of the trust, could my wife’s income still be used in the finance application when buying in a trust even though she is not part of the company?

Which leads me to my next question.. Can you have multiple guarantors per finance application? i.e. myself (director) and my wife (no connection to the company)?

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Positive cashflow to the buyer is not the same as positive cashflow the the bank. With current rates postive cashflow for the buyer tends to be about 9% rental return. With the banks lending criteria it tends to be about 12%.

As previously stated, your wife has an implied interest in the property even if she's not on the legal documents holding the property (either in personal names or via a trustee company). Your wife has a connection to the company becuase she's married to the director. As a result she can appear on the application.

Either way she needs to be disclosed to the bank, so as long as she's doesn't have nasty things like a default in her past, there's little reason why she shouldn't be on the application.

Terry - Thanks, i was waiting for you to jump in

PT Bear - Thank you too, but how is this stratgey a high risk of being rejected? All you doing is applying for finance on behalf of your trust (nothing wrong,no risk) and when you reach your borrowing capqacity with a bank, then perhaps try approaching a bank which doesnt consider your gauretees in your finance application (nothing wrong,no risk, nothing to loose)?