How to Secure a Mortgage Through a Trust

Using a trust to purchase an investment property is a popular way for buyers to benefit from asset protection and tax advantages.

But, mortgages secured through a trust can be complex, so it’s important you understand the unique considerations and requirements involved.

Types of trusts

In Australia, there are several types of trusts you might use for a home loan. Depending on your lender and loan type, there may be limitations as to which type of trust you can use.

Family trust

This is a discretionary trust set up to manage assets and distribute income to beneficiaries. The trustees can decide how to distribute income and assets among the beneficiaries.

Unit trust

In a unit trust, the assets and income are divided into units, like shares. Beneficiaries receive income or capital based on the number of units they hold.

Hybrid trust

This combines the features of both discretionary and unit trusts, allowing some of the income to be distributed at the trustees’ discretion while other parts are distributed based on unit holdings.

Self-managed superannuation fund (SMSF)

An SMSF is set up by a trust to manage their superannuation. Unlike a normal super fund, the trustees have direct control over the assets that your superannuation has invested in. SMSFs are regulated by the Australian Taxation Office (ATO) and must comply with strict legal and regulatory requirements.

What does a lender look for in your trust application?

When you apply for a home loan through a trust, your lender will consider several factors:

• Type of trust: Not all trusts are accepted by all lenders.

• Credit record of the trust: Sometimes, trusts themselves have a credit record. This will be reviewed by the lender to flag any potential credit history issues.

• Trust deed: This specifies the beneficiaries and trustees. Your lender will use this to check the trustee has the authority to apply for a home loan.

• Loan structure: Depending on the financial goals of the trust, you may choose to put the loan in the name of the trustee or the director of the trustee company, rather than in the trust’s name.

What documents will a lender need for a trust loan application?

This will vary depending on the lender, type of trust and type of mortgage. However, you can expect to have to present a copy of the trust deed and identification for each trustee, the director of trustees and trust beneficiaries. You’ll likely need your trust’s tax returns and notices of assessment.

Some lenders offer low-doc home loans for trusts, which can be particularly helpful for newer trusts that do not have tax returns or notices of assessments. In these cases, you might need to prove your income in some other way (such as by declaring it).

What are the advantages and disadvantages of using a trust for a mortgage?

Pros

• Asset protection: Assets in a trust are not in your personal name. This may protect these assets from creditors and legal claims.

• Tax benefits: Certain trust structures can offer tax benefits, such as income splitting among beneficiaries to reduce overall tax liability.

• Estate costs: Some trust types make passing assets on following a death easier and with fewer tax implications.

Cons

• Costs: Establishing and maintaining a trust can be expensive considering the legal and accounting fees involved.

• Limited lender options: Not all lenders provide mortgages to trusts.

• Negative gearing restrictions: Losses from negatively geared properties held in a trust can’t be offset against other personal income. This means the loss is trapped in the trust until it generates enough revenue to cover it.

Do beneficiaries act as guarantors for a loan with a trust?

Depending on the lender and type of trust, it may be required that all adult beneficiaries act as guarantors.

Buying property through a trust

Given the complexities involved, getting advice from a mortgage broker is highly recommended. A broker can provide guidance, assess your financial situation and help you find the most suitable loan and trust structure for your investment goals.

By working with a professional, you can increase your chances of a successful property purchase and maximise the benefits of owning property within a trust.

Are you interested in buying an investment property through a trust? Neses Finance can help take you through your mortgage options. Contact us today.