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Serviceability and trust income

Discussion in 'Property Finance' started by scientist, 29th Nov, 2015.

  1. scientist

    scientist Well-Known Member

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    I have two questions regarding serviceability

    First question: if I have shares in a discretionary trust and the beneficiaries are currently only me and my wife (kids are beneficiaries too but we have no kids yet) how would the bank treat the share portfolio income (dividends etc) in terms of serviceability?

    Second question: If I have cash sitting in offset account saving me interest, based on past experience the banks don't care about the interest I'm saving because their justification is I can take that money out and spend it on a holiday at any time. However if I use that cash to buy a share portfolio that produces income, will the banks factor that portfolio income in for serviceability? It's silly though because essentially the cashflow is the same in both situations (4% interest saved vs 4% dividend yield).
     
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Not a broker, but in my experience:

    Need a year or 2 of dividends records for banks to consider them. Being in a trust shouldn't matter much as long as its 'yours'
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. You cannot have shares in a discretionary trust. You could be a shareholder in the trustee company and/or a discretionary beneficiary of the trust.

    Income of the trust would be taken into account if it is distributed to you..

    2. some banks will take dividends into account.
    Its not silly as you have increased your income without increasing your debt.
     
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  4. scientist

    scientist Well-Known Member

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    True on a technical level but it's like the cash was saving 4% pa by being in offset whereas if used to purchase shares, its yield is 4% so substantially the same in terms of cashflow - just a form over substance thing


    Regarding showing dividends over a year or two - what if it's a recent purchase and I only have, say, 1 quarterly dividend statement? are banks strict on insisting holdings be a year or two old before factoring its income into serviceability?
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    They would probably want to see at least 1 tax return with the dividend income.
     
  6. Observer

    Observer Well-Known Member

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    I've been thinking about the same recently. I suppose it makes sense to invest in shares in such scenario. Though, I was considering buying shares (ETF) in wife's or my name.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Have you considered a discretionary trust?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Lol, you obviously have considering the title of the thread!
     
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    If you own shares or any other assets in a discressionary trust, then the dividends would be distributed to the beneficiaries and could ultimately be used in the servicing calculations. Lenders will want tax returns for the beneficiaries and the trust over several years to demonstrate this.

    In practice, it's difficult to demonstrate dividend income regardless of the entity it's held by. It's often 'case-by-case' and as a result we rarely use it and only when necessary.

    Cash in an offset account and even redraw on a loan is ignored by the same logic that lenders don't care about what's owing on a credit card, they care about the limit. Also consider that many people when take money out of that offset account to pay deposits, the interest saving disappears very quickly.
     
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  10. Observer

    Observer Well-Known Member

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    Yes Terry. Still trying to get my head around pros and cons of a trust in this scenario.
     
  11. Observer

    Observer Well-Known Member

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    @Peter_Tersteeg I think it would make sense to take into account cash in offset providing the bank can see a pattern that the borrower accumulates money there without withdrawing much (e.g. providing statements for the last N months or even years indicating genuine savings in offset). Of cause from banks perspective there is always a risk that the borrower can withdraw the money which probably the main reason why the banks don't do this.
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    As you say, it demonstrates a favorable pattern of behavior and the banks do take this into account in their credit scoring. A significant sum of money in a savings account does help your application in a favorable manner, just not from a servicing limit perspective.
     
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