Trust and effect on serviceability and borrowing capacity

Hi P-Chats,

How does owning a trust affects serviceability and borrowing capacity? Does lenders really dislike dealing with trusts?

 

What do you mean by 'own a trust'?

 

both?

 

purchasing a property using a trust structure?

 

Is the Trust just the holding entity and not trading?

 

Trust servicing would generally be looked at if here is a connection. Lenders will do a ASIC search and ask what ABC Nominees Pty Ltd does,....Oh its trustee and go from there. Or see tax issues in a return.
Guarantees ? - trustee Directors for example.
Type of trust can affect this - eg fixed v discretionary. Most lenders will ignore disc trust net positive income as there is no certainty. But look unfavourable on net trust losses (cashflow).
Depends who borrows too.

Some lenders are better with trust issues than others.

 

What type of trust?
And how does a trust buy owner occupied property?
Who is the trustee?
Why buy in a trust at all?

the question is confusing, and shows lack of understanding of what a trust is. Dont think about using one unless you are paying for good advice and at least understand the basics.

 

It's complicated...

With most lenders, purchasing through trusts will reduce your borrowing capacity. One of the reasons behind this is you can't gear the trust losses against your personal income (negative gearing is limited).

However there are some strategies where using trusts can significantly increase your borrowing capacity with a few lenders. It's got to be done carefully and can be unreliable, it could be considered quite risky. I wouldn't recommend these strategies in most cases.

 

You cannot own a trust, other than perhaps a unit trust.

It is the trustee of the trust that borrows, usually, and it is treated as a different entity for tax purposes so no negative gearing benefits are used by lenders in working out serviceability. Where the trustee is a company they will usually want a personal guarantee of the directors and sometimes any adult beneficiary that is named in the deed.

But trusts can improve serviceability greatly. see
Trust Strategies to Increase Borrowing Capacity Trust Strategies to Increase Borrowing Capacity

 

What Peter said. If property is cash flow negative (rent doesn't cover loan interest and other expenses) then the loss is held inside the trust and cant be offset against personal PAYG or businesses incomes. For this reason most trust loan arrangements decrease overall borrowing capacity.

 

True to the words Terry is correct.

Disclosure: I have never met Terry or use his service. Respect his efforts that he has contributed to this community.

 

I have bought properties in a corporate trustee trust & my individual name as well. I currently have 2 trusts that hold 3 properties. And I hold 6 residential properties under my individual name.

My set up is below:

Trust A (ABN & GST registered) - I only have 2 commercial properties in it
Trustee for Trust A (ACN, ABN & GST registered)- I have a company car debt in this.

Trust B (ABN & GST registered)- I only have 1 residential property in it.
Trustee for Trust B (only ACN registered, it's acting as a 'shelf' company) - no liabilities

Basically, when I go for finance:
* If I buy under TRUST A, the lender checks serviceability from the income & liabilities of TRUST A & my individual income & liabilities. It doesn't check for TRUST B debt or cashflow at all.
* If I buy under TRUST B, the lender checks serviceability from the income & liabilities of TRUST B & my individual assets’ cashflow & my income & liabilities. It doesn’t check for TRUST A debt or cashflow at all.
* If I buy under my individual name, it only checks my income & liabilities under my individual name.

I plan to move some residential properties under TRUST B in the next 24 months.

If TRUST A & TRUST B exceeds $2M asset value, I will open TRUST C and continue.

I hope this helps.

 

This is essentially what I hinted at in my previous post above. Most lenders won't do this and it's not a strategy that you'd want to rely on 100%. The lenders that do view their servicing in this manner have been known to have inconsistent outcomes.

 

A trust cannot own property or borrow as its not a person legally, It would be the trustee that owns and borrows. Where the trustee s a company it would be the company borrowing, with the director(s) giving a guarantee.

If the trustee of Trust B is different and it Borrows the debt of the Trust A trustee won't be taken into account as this is a separate legal entity, but if the directors are the same the guarantee giving to Company A's loan will generally be treated as if it is a debt of the guarantor.

If the guarantor buys in their own name generally the debts they have guaranteed will be treated as their debts for servicing.

there are limited lenders who won't count guarantees.

 

I have managed to get through this because I am in the process of refinancing one of the property that's under my individual name. The bank has only asked for my personal liabilities and advised that they do not require information of Trust A & Trust B. The situation with me is that Trust A & Trust B are positively geared. I don't know how it'll be if they're negatively geared. I wouldn't put a negative gearing asset inside a trust because I won't be able to take advantage of negative gearing for tax purposes anyway.

 

Westpac or St G?

 

With HSBC (for their international facilities).

 

I don't know their policy, but if they don't need to know about guarantees given all the better for you.