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Legal Tip 91: Structuring a Trust to Maximise Borrowing Capacity

Discussion in 'Legal Issues' started by Terry_w, 21st Oct, 2015.

  1. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    No they weren't. They did see that and no eyebrows were raised.

    In your example the wife is a separate legal person responsible for her own debt. The husband may be paying the loan but is not legally liable for the debt - it is a gift.
     
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  2. albanga

    albanga Well-Known Member

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    With the adding people for serviceability, it is correct then in saying that this could also be a negative if that guarantor holds a lot of personal debt?

    For example I bring my brother into the trust as a guarantor an we decide to hold some property. I then want to buy an IP under my personal name and apply for the loan. Given I am guaranteeing the trust and so is my brother then would i be right in assuming i would also be responsbile for his personal debt?

    Or have I missed the point on this one :p
     
  3. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    If could be a negative and in that case you would not use that person. All their personal incomes and debts would be taken into account.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I have employed this strategy with success.

    I've also seen it fail, costing time and money and earlier this year it almost cost a client their deposit.

    To successfully employ this strategy people need to understand it in the contact of their specific lending ability. It can't be taken as a general strategy which will work for everyone. Specific lending/serviceability advice is required.
     
  5. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    How did it fail Peter?
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Client was purchasing an IP and wanted to do it separately from his wife to preserve her serviceability. As she was considered a dependent, the living expenses caused the deal to be declined (didn't help that this was all around the time that HEM was being rolled out). I tried to lodge the deal with lower living expenses justifying it that her income meant she was not financially dependent on him. The application failed and the vendor was unwilling to extend the finance clause.

    Client was preserving the wife's income for 'future borrowing capacity'. What he didn't realise is her income wasn't high enough to borrow anything independently. It is high enough to get them into several more properties when used in a joint application. There was no value in using this strategy, it only caused delays and cost money. It was a lot of effort to convince this particular client of this.

    This strategy doesn't work for everyone, but I've seen a lot of people over the last few years who simply assume that it will without understanding how it applies to their individual circumstances. It's also a lending strategy that only has a real benefit when one persons income drops for a period of time.
     
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  7. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    Do you mean the lender took the husband as servicing the wife's debts?
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It didn't even get that far. They saw her as financially dependent on him, but without any consideration to her own income. She didn't have any significant assets or liabilities at the time. The extra living expenses was enough to kill the application.

    In the past I've had some success getting lenders to recognize an individuals living expenses below that of a couple if it can be demonstrated their partner has sufficient income to not be dependent. Recently the NAB and ANZ have refused to accommodate this and assume minimum couples living expenses regardless of how strong the other person's financial position is.

    Not disclosing a spouse or child at all on an application will be considered to be fraud, regardless of how you try to justify it to the lender. A few years ago a client didn't disclose a pregnant wife to me and lodged him as single. The bank found out 3 months later he had a wife and child. Innocent on my part, but the resulting investigation was something I do not care to repeat.
     
    Last edited: 26th Oct, 2016
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  9. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    I took it, from above, that the lender was assessing the husband on the wife's debt even though he was not legally liable for it.

    A spouse not working would be a financial dependant.
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Wife didn't have any debt, but she was working and not actually financially dependent.

    The lender ignored her income as she wasn't on the application. They then decided she was dependent and costed the living expenses accordingly, which caused servicing to fail.

    Couple were adamant that the wife not appear on a loan application for a property in his name only. Hilarity ensued.
     
  11. albanga

    albanga Well-Known Member

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    Sorry @Terry_w I still had another question with this one.

    Say my wife purchases our PPOR in her own name, say loan is 500k.
    I then purchase an IP in my own name, say 300k.
    I then purchase another IP within a trust with myself as loan guarantor. Say 400k.

    I have then exhausted my borrowing capacity and say my wife is back working and we want to again purchase within the trust, so wife joins the trust as a loan guarantor. Am I correct then in thinking that we would both be responsible for each others entire debt.

    500k + 300k + 400k + new purchase.
    Even though we both hold a property each in our own names.
     
  12. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    No, you wouldn't be responsible for your wife's debt.
     
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  13. albanga

    albanga Well-Known Member

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    And guessing she wouldn't be responsible for the IP in my name?
     
  14. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    You are separate legal entities so A is not responsible for B's debts unless A guarantees those debts.
     
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  15. albanga

    albanga Well-Known Member

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    O.K I think i get it now.
    In those example you are not responsible for each others debt as such but given you are both now going onto the application for the new purchase within the trust, you would both need to declare your personal debts anyway.

    Wife = 500k PPOR in personal name + 400k already in trust as your now guarantor on the trust + new purchase

    Me = 300k IP in personal name + 400k already in trust + new purchase

    So looking at it like that, your really no better off in terms of servicing.
     
  16. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    You have completely missed what the thread is about.

    If you look at it your way 'you' are no better off. But if you look at it another way serviceability can be extended because of the flexibility trusts offer.
     
  17. albanga

    albanga Well-Known Member

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    Sorry Terry, I do understand your thread, my comment was not a negative on your thread, but more a negative on me trying to understand it.
    I now understand how and HOW NOT this works, so as always thank you :)
     
  18. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    I will write up another explanation about the 4 ways a trust can improve borrowing capacity and post it separately. (and the 2 ways a trust could hinder).
     
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  19. albanga

    albanga Well-Known Member

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    @Terry_w your an absolute credit to this forum!
    Seriously where is your office located, im going to send you a bottle of scotch?
     
  20. Brady

    Brady Well-Known Member

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    Did you try this with multiple lenders or just ANZ?