Unlimited borrowing using Family Discretionary Trust

Hi All,

I learned from someone who is an experienced mortgage broker that if you borrow using Family Discretionary Trust using Corporate(Pty Ltd) Trustee, your asset and liabilities for this purchase are not counted in the next purchase by some lenders, essentially leaving you with the same borrowing capacity which you had prior to this purchase under trust structure.

Say, for example, with my remaining borrowing capacity of 500K, I purchase a property in Brisbane under Family Discretionary Trust using Corporate Trustee and myself along with spouse being the beneficiaries of the trust(guarantors for loan) and borrowed whole 500K. For the next purchase, the lender would just look at assets and liabilities in my personal names and would ignore this Brisbane purchase and will just need an accountant letter with a confirmation that this trust isn't loss making.

Wondering, if we keep repeating the usage of such trust structure with new trust for each purchase, can we keep borrowing 500K forever as long as we buy positively geared properties and got deposits arranged ?

 

Thanks mate. Yes, got understanding that negative gearing benefits are trapped within the trust, which if not utilised initially can be offset during selling time against the capital gains. So, not total loss I would say, but certainly good yielding properties should be targetted under a trust.

 

Will this work for small 2-3 units residential development? I.e. buy site and build and sale at end? I.e. small development project.

 

Its not for new stuff, its for existing stuff.

 

Borrowing for 2+ units is commercial lending, so could be a different ball game. Also, for developments with partners, people generally use unit trusts than family discretionary trusts as I understand. I could be wrong here and leave this for professionals to correct.

 

A trust is not needed for this strategy. It works because the guarantees are not taken into account for serviceability.

 

It depends who the next borrower is.

 

Are these few negatives of buying under a trust?
1. No negative gearing as mentioned before.
2. Higher interest rates because of commercial lending.
3. No land tax threshold (except QLD).
4. Additional accounting requirements costing 2-4k a year

Any more?

 

Without trust, how can this be done ? How can personal asset and liabilities not be counted for calculating your borrowing capacity ?

 

2 or 3 definitely is not commercial lending, lots of residential lenders do this. There's also a few residential lenders that will cover 4 or 5. Some people will use trusts for these deals, others don't. Specific advice is needed to understand what's best for the circumstances.

The strategy of using guarantors as a path to unlimited lending can work, but make sure you've got the cash flow to support it. Buying lots of properties through trusts can be expensive. Combine this with rising rates and things can go backwards quite quickly.

There's also a very limited number of lenders that it works with.

 

1. Trusts can negative gear like any tax entity. but like any tax entity losses of one tax payer cannot be used to offset income of another taxpayer.

2. This is another myth. Same interest rates, not commercial lending if the trustee if buying residential

3. what about the other states. No threshold in NSW, but that is one of the only states.

4. That is probably a high figure. might cost about $500 extra per year.

 

A trust is not a legal entity that can borrow. It works where the borrower is a company, whether acting as trustee or not.

 

Correct, the trustee in this case is a corporate and the beneficiaries are individuals who become the guarantors for the loan.

 

They are not guarantors because of being beneficiaries but because of them being directors.

 

Thanks for correcting, just learning this stuff. Is there a different model than discretionary trust which can keep you borrowing?

 

A company owning assets in its personal capacity works the same way

 

Hey all, I have got my offer accepted on two properties today and I am keen in going ahead with both using family discretionary trust. I am happy to use two different trusts as total borrowing required of (530K + 270K) may not work as our total borrowing capacity left is around 500-550K. Glitch is that I'll be signing the contract on Monday for both of them together. Question is can they progress in parallel without impacting each other if it's using different Family trust with different corporate trustee and myself and my spouse as directors ? Is this something that can progress or are their other ways to get both deals across the line ?

 

Do the corporate trustees exist and have the trust deeds already been executed? Do you have a lawyer advising you on this? Has your mortgage broker said that you can get this over the line?

 

Setting up family trust with corporate trust this Monday after these contracts are exchanged. While signing, would write "my name and/or nominee" for now, and would update once the trust is setup. Spoke to accountant who would be able to get the name within a day but need to speak to mortgage broker yet as it's difficult to reach on weekends. Hence, seeking this advice from experts here on the possibilities or if this is something which can be done ?
Borrowing I have been confirmed is around 500-550K with Resimac. All I am trying to understand is using same/different trust structures can two parallel loan applications progress and get approved, one of them say for 530K and other for 270K ?