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Trust lending: It has a place, but exercise caution

Trust lending: It has a place, but exercise caution
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Trust lending can be a powerful tool for an avid investor who knows what they’re doing. However, there is some confusion surrounding this method of borrowing and, for an ill-equipped borrower or broker, it can spell danger.

Trust lending involves funds being lent to an entity or individual under the framework of a trust agreement. In this arrangement, a trust serves as a legal vehicle to facilitate and secure the lending process.

Eva Loisance, head of broker at Finni Mortgages, said that this form of lending is beneficial to the savvy investor with a large portfolio. This has reportedly seen a surge in the last couple of years.

“Most people would go through trust lending is when they start building portfolios and they reach that ceiling of borrowing capacity. That’s why in the last two years or so, we’ve seen a huge increase in trust lending,” said Loisance.

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“Some buyer’s agents are promoting this so people can keep building their portfolio. So, what happens is when you buy a property through a trust other than the benefits of asset protection, income distribution and these sorts of things. In terms of lending, the trust is positively geared and that is verified just by an accountant’s letter.

“It means we can ignore that debt to keep borrowing money. So, I guess people were like awesome, jackpot I’m just going to buy all my properties in a trust make sure they are all positively gear and I can just keep doing that forever. So that’s why people buy through trust, the capacity to keep going and build massive portfolios.”

Although there is certainly a place for trust lending, it’s a niche. Those entering these agreements without the proper foresight could stand to disadvantage themselves.

“A few years ago, it was for a more sophisticated investor. Someone that would have had three, four, five properties and has been advised [to buy properties through a trust],” said Loisance.

“But in the last few years really anyone, sometimes those with only one or two properties are looking to do that. When you invest in a trust, one of the big negatives is you don’t get negative gearing so you can’t claim that back against your income. It pays to go to a broker when you’re trying to figure out because you could get declined on the spot with some lenders and approved on the higher amount with others.”

Bill Childs from Limitless Lending Group agreed that the popularity in recent years may have caused some to believe it was a viable option for anybody.

“It’s gaining popularity because it’s trending. You’re not getting a borrowing capacity benefit initially anyway. You will down the track but there is a certain amount of people that realise the benefit. I think brokers are exploiting it a little bit and I think that I’ve seen some brokers talking about it online and I’ve watched the video and I’m like you don’t understand this,” said Childs.

“That is the danger with brokers that don’t understand it themselves putting people into it that shouldn’t be in it because you might not see the benefit in this structure if you put two or three properties in for five or 10 years so you’re better off having it in your personal name having the negative gearing benefit ease of lending and less setup costs.”

With this increased popularity comes more scrutiny, said Loisance. Banks are keeping a sharper eye on these loans and becoming more stringent in rejecting borrowers.

“In the last quarter, we’ve seen banks asking more and more questions about it. Why are you doing it and how can you prove it’s positively good? They’re starting to not believe the accountant’s letter,” she said.

“Some banks are even starting to decline on comfort which we haven’t really seen before. [They say] we’re just not comfortable with the application. We don’t really understand what’s going on there behind the scenes. I think we’re going to see a lot more scrutiny around people investing through trust.”

Some borrowers are going down the trust route due to cost-of-living challenges. Not being able to afford a deposit has people thinking outside the box. These aren’t whom trust loans are catered to, however.

“Once we see rates decrease this year, people might think might realise well it was a rush this decision and might not be that worth it,” said Loisance.

“We’ve seen that this surge over the last two years. Some of them, they’re quite clever, they make it work, they build a granny flat at the back or they inject money into the trust itself to make it positive. But I haven’t really seen yet people making it successful so quick that within a year the trust is positive and can keep going.

“So, I find the theory of that works very well but in this current economic environment it’s really hard to make it work and it might take three, four, five, six years before it’s positively geared and you can go again. Is it worth the pain of doing it, the money of doing it? And most people we know don’t really build big portfolios, they stop at two or three so you might actually never need to do that.”

All in all, Loisance said that there is certainly a place for trust lending. Those with multiple investment properties, around four or more, will have a use for it. The savvy investor will make use. Those looking to enter the market, however, should think twice before committing to a trust-based loan.

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