Trust Home Loan: What is it & How to apply?

If you’re thinking of taking out a trust home loan, here are a few things you need to know:

What is a trust home loan?

In a trust home loan, a mortgage is taken out by a trustee on behalf of a trust. Since the trust is used to obtain finance for the property purchase, it is the trust that holds the legal title to the property for the beneficiaries of said trust.

A trust home loan is often used for investment properties, as it can provide the buyer more control over asset protection and distribution, and estate planning, as well as manage wealth and tax obligations. Borrowing funds to finance a property purchase using a trust comes with unique requirements and considerations.

The main difference between a trust home loan is that the borrower is the trustee or director of the trust instead of a person or a business.

Who is eligible for a trust home loan?

Trustees may apply for a trust home loan given that they meet the specific lending criteria, which vary depending on the lender. When a lender receives a trust home loan application, they will assess the following:

• Type of trust – The lender will review if the type of trust is in line with their lending criteria, or to see what lending option best suits the borrower.
• Credit files – Similar to reviewing an individual borrower’s credit report, trusts have credit files that can be assessed by lenders.
• Trust deed – This is to confirm who the trustees and beneficiaries are of the trust. The home loan will be put under the trustee’s name, not the trust itself. The trustee must be given the power to apply for loans.
• Beneficiaries – Lenders typically require a guarantor for trust home loans. Often, the guarantors are beneficiaries of the trust.

It’s best to discuss home trust lending qualifications with the lender directly. Call loans.com.au today to learn more about the trust home loan application process. Our friendly lending specialists will be more than happy to help! Reach us at 13 10 90 or arrange a call and we’ll get back to you.

How does a trust home loan work?

The structure of a trust home loan is different from the standard home loan. Trust home loans involve several elements, such as the trustee, the beneficiaries, and the guarantor of the loan. Each one has their own responsibilities.

• Trustee – Responsible for managing the trust and is the legal borrower of the trust home loan. They will be the ones to apply for the home loan.
• Beneficiaries – These are the ones benefiting from the trust.
• Guarantor – Lenders may require a guarantor for the loan in case the trust isn’t able to pay it back. The guarantor can be the trustee, if it is an individual, or the director of the company if the trustee is a company, and the lender requires a personal guarantee. Beneficiaries may also be guarantors.

What type of trust can be used for a trust home loan?

Trust home loans aren’t limited to just one type of trust. However, it still depends on the lender’s discretion and guidelines whether a specific kind of trust is eligible for a trust home loan. Different types of trust include:

Family trust

This has a discretionary trust structure that is typically used to hold assets for a family. This type of trust offers flexibility in distributing assets to its beneficiaries. Those who are under 18 years of age can be listed as beneficiaries of a family trust.

This type of trust is typically used to protect assets, manage family wealth distribution, and plan taxes. When using a family trust for a trust home loan, borrowers generally require personal guarantees, which are often the adult beneficiaries.

Unit trusts

In a unit trust, the assets within it are divided into units, which represent ownership of shares. With a unit trust, multiple investors have defined ownership of certain shares. This type of trust may be suited for unrelated parties managing shared investments.

Usually, loans taken out by unit trusts would still require a guarantor from the unit holders. Because of the nature of unit trusts, the home loan could be rather complex, making it more difficult to manage for those who aren’t well-versed in trust financing.

Hybrid trusts

This trust is a combination of discretionary and unit trusts. In property ownership, for example, might be divided into units similar to unit trusts, but the overall distribution of the trust’s income can depend on the trustee’s judgment or preference, like a discretionary trust.

A guarantor is typically required for all the adult beneficiaries of the hybrid trust. Due to the complicated nature of hybrid trusts, getting finance can be more difficult, and the home loan’s structure may be highly complex.

Self-Managed Super Fund (SMSF) Trusts

An SMSF trust is designed to manage superannuation investments. There are strict requirements and guidelines trustees must follow when using an SMSF to borrow funds for an investment.

SMSF home loans are regulated by super laws and have strict requirements. Getting a home loan through an SMSF may be complicated, especially for those without experience or expertise in managing this type of trust. The trustees of the SMSF may need to provide a personal guarantee when using an SMSF home loan.

How do you apply for a trust home loan?

The process of applying for a trust home loan is similar to other home loan applications. The borrower, in this case the trustee, is required to submit a loan application form along with the necessary documents. Lenders usually require the following documentation:

• Verified copy of the trust deed
• Certified copy of the company constitution (if applicable)
• Identification of the trustees and the director of trustees
• Identification of the trust beneficiaries
• Tax returns and notices of assessment for the trust

The lender will evaluate the creditworthiness of the borrower and determine the interest rate and other terms of the trust home loan. Once approved, the borrower will receive the funds so they can finalise their property purchase. When the property has been purchased, the borrower will repay the trust home loan according to the terms of their finance.

Advantages of using a trust home loan

Trust home loans can be a way for investors to diversify their investments and take advantage of potential tax incentives. Here are a few benefits of taking out a trust home loan:

• Asset protection – Assets in a trust are separate from personal assets. This means it can generally shield it from personal liabilities or potential creditors.
• Tax benefits – A trust can offer flexibility when it comes to tax planning. Using a trust, you have the option to distribute income among beneficiaries, which could potentially reduce the overall tax burden.
• Estate planning – Since assets will remain within the trust structure, investors can help manage succession planning and long-term wealth accumulation.
• Increased borrowing capacity – By borrowing through a trust, this may influence how lenders assess your finances differently and potentially give you the opportunity to build a more diverse property portfolio.

Things to consider before applying for a trust home loan

Trust home loans can offer a lot of perks for investors; however, there are important drawbacks you need to consider. Some disadvantages of getting a trust home loan include:

• Complicated loan process – Borrowing through a trust requires a thorough understanding of the complex legal and administrative procedures and guidelines. Trustees must also remain compliant with tax obligations, which may be difficult without professional guidance.
• Requirement for a guarantor – Lenders may require a guarantor for the loan, which may be the trustee or the trust's beneficiaries. This may not be ideal for those who want to use trusts as a way to limit personal liability.
• Limitations on tax benefits – When the trust puts a property up for sale, it may not be exempt from capital gains. You may also have negative gearing limitations as a beneficiary; you cannot offset losses against personal income. Some states also limit the land tax-free threshold for properties held in a trust.

Want to learn more about trust home loans?

Trust home loans can be complicated with strict requirements and compliance guidelines. Get in touch with loans.com.au today to find out what a trust home loan entails. Call 13 10 90 or arrange a call!

Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.

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