Loan Tip: Getting a Preapproval Before Ownership Structure is Determined

When you don’t know who the owner of a property will be it is a bit difficult to apply for a preapproval as the borrower will usually be the owner of the property. So, if you buy the property in the name of B where A is the one with the preapproval a whole new loan application will need to be done.


If you are planning to set up a trust the trustee will need to apply for the loan and the trustee must be set up before it can apply for the loan. Strictly speaking the trust must be established at this point from the bank’s point of view.


A company holding property, whether as trustee or in its own right, the company will need to be set up and registered with ASIC before it can apply for a loan – although under the Corporations Act a future director for a company could enter into a contract on behalf of the company before it exists, and the company can ratify it later once it is set up. This can’t be used for loans though.


Where you are tossing up whether to own as joint tenants or tenants in common and the different shares this can be decided just before the full approval is sought and won’t affect the pre-approval.


If undecided who will own the property out of the spouse and you, you can apply for a preapp under both names and modify it later – but keep in mind serviceability will be different where only one will be on the title to an investment property. This is because of the different tax treatment for rent and addbacks, but where both spouses are on the same tax bracket the difference might be minimal.


Example

Homer is thinking about buying an investment property in either QLD or NSW. If the property will be located in QLD he would use the trustee of a discretionary trust to own it, if the property will be in NSW he would use a company to own it (mainly due to the land tax laws).

Homer plans to set up the structure to hold the property while negotiating the deal and then sign the contract as soon as possible after it is set up.

But what about the finance? He, or more specifically, the trustee or the company will not be able to apply until the structure is set up. He could apply in advance under his own name, if he wanted to, but he would then need to reapply once the company is set up – whether the company will be acting as trustee or not. This would result in 2 credit hits and 2 applications so it might be better to see a broker and work out the prospects for approval and then decide either to do this or not.