Buying property through a trust can offer significant benefits, particularly if you're looking to build a larger portfolio. It’s a strategy that can enhance affordability and provide various tax advantages, making it possible for some to own ten or more properties. However, as with any financial decision, it’s crucial to understand both the benefits and the potential drawbacks.

Why consider a trust for property purchases?

Purchasing property within a trust structure can be highly advantageous, especially when it comes to affordability and long-term financial planning. Here are some of the key benefits:

Enhanced Affordability:

If structured correctly, a trust can greatly improve your borrowing capacity, potentially allowing you to acquire more properties than you could as an individual.

Tax Efficiency:

Trusts can be an effective way to distribute profits in a tax-efficient manner.

Lower land tax on larger portfolios:

Although land tax may be higher for one or two properties, it often decreases significantly as your portfolio grows.

Asset protection:

Trusts offer a layer of protection for your assets, which is particularly beneficial for those with larger property holdings.

Cost efficiency:

Over time, the tax benefits of a trust can outweigh the initial setup and ongoing costs, making it a cost-effective solution for large portfolios.

What are the potential drawbacks

While the benefits are appealing, there are also some downsides to purchasing property within a trust that you should be aware of:

Setup costs: Establishing a trust can be expensive, with initial costs around $2,000. Complexity: Trusts involve a steeper learning curve and may require more time to manage. Ongoing fees:Annual accountancy fees for maintaining a trust can run up to $2,000. Higher land tax for smaller portfolios:If you own only one or two properties, the land tax might be higher compared to holding them in your name. Negative gearing constraints:Losses incurred within the trust stay within the trust, which might limit immediate tax benefits.

How can a trust boost your borrowing power

Net profit: $1,000

Investment property profile

Value: $500k
$400k loan, 30 years loan term, 6.5%, interest only 5 years
Rental income: $600 p.w. or $31,200 p.a.
Mortgage expenses: $ 26,000 p.a.
Rental expenses: $4,200 p.a.

Let’s take a look at the above investment property. Despite showing a net profit of $1,000, how it impacts your borrowing capacity differs based on ownership structure. When held in your personal name, lenders typically reduce your borrowing power by buffering the interest rate, discounting rental income, factoring in rental expenses, and assuming principal and interest repayments. This results in the bank assessing this property as a $23,218 annual loss, which lowers your capacity for additional investments. However, if you use a trust structure, some lenders allow you to exclude the income and expenses from your personal servicing calculations, significantly boosting your borrowing power.

Your serviceability assessment

Net loss: $23,218

Scenario 1: Owned in your own name

Rental income: 80% of actual rental income = $24,960 p.a.
Mortgage expenses: $400k loan, 9.5% P &l over 25 years = $ 41,937 p.a.
Rental expenses: 20% of rental income = $6,240 p.a.

No impact on your personal borrowing capacity

Scenario 2: Owned under a trust

Income: $0
Expenses: $0

How can a trust help you build a large property portfolio?

For those aiming to build a substantial property portfolio, having the right structure in place is essential. We've seen that certain lenders allow you to exclude properties owned within a trust from your personal serviceability calculations, as long as the trust is profitable. This opens the door to continued property purchases through a trust, provided you have sufficient deposits and borrowing power in your personal name, without quickly reaching your borrowing limit. Here are some key dos and don’ts to consider when adopting this strategy.

Don'ts

Max out on your primary residence:

unless you anticipate a significant and consistent increase in your income, this approach may limit your ability to pursue immediate investment opportunities.

Invest solely in your own name:

this strategy can quickly restrict your borrowing capacity and is better suited for individuals who don't intend to expand their property portfolio further.

Dos

Have a clear investment strategy:

this allows you to stay focused and make informed decisions at every stage of your journey.

Utilise trust structures for investment:

Incorporating trust structures, whether alongside personal purchases or exclusively, can significantly expand your property portfolio.

Work with experts:

building a large portfolio requires a team of professionals who can guide you through the financial, legal, and tax aspects of your investments. Mortgage brokers, accountants, financial advisers and even buyer agents play critical roles in helping you make the right decisions, especially when using complex strategies like trusts.

What if your serviceability is maxed out?

If you’ve reached your borrowing limit due to properties held in your name, here are a few strategies to consider:

Selling a property:

Selling can free up both capital and borrowing capacity, allowing you to begin purchasing properties within a trust. However, it’s important to note the potential Capital Gains Tax (CGT) liability when selling, which could reduce the net proceeds available for reinvestment. Additionally, you'll incur costs such as selling fees and stamp duty, but this approach may result in a more streamlined and manageable portfolio.

Refinancing into a trust:

If you have a strong-performing property, you might consider refinancing it into a trust instead of selling. However, this option will trigger a full loan application process, and you'll need to account for stamp duty and other costs. Also, keep in mind that the title transfer will trigger CGT.

Holding steady:

If you're not looking to expand immediately, holding onto your current properties and waiting for your financial situation to improve might be the best approach. Keep in mind that future growth in property values or rental income can help boost affordability for future investments.

Each option comes with its pros and cons, and careful planning is essential to ensure you achieve your long-term investment goals while minimising tax and other expenses.

How can you mitigate the risks of investing through trusts?

While investing through trusts can be highly beneficial, it’s not without risks. The ability to acquire more properties than usual can lead to overexposure, particularly if your portfolio becomes unprofitable. If that happens, refinancing can become difficult, potentially leading to financial challenges. To reduce these risks:

Maintain equity: Keeping a buffer of equity in each property allows you to sell off unprofitable trusts if necessary.
Plan for interest rate increases: Always assume that interest rates will rise and plan your finances accordingly.
Prepare for principal and interest repayments: Expect that interest-only loans may eventually convert to principal and interest, and plan your cash flow to accommodate this change.

What is the home loan process for trusts?

When purchasing property through a trust, it’s essential to understand who is designated as the borrower and purchaser, as these roles depend on your trust structure. Different lenders have specific policies around which trust structures they accept, so consulting with a qualified accountant or a tax lawyer can help ensure everything aligns with both legal and lender requirements.

07 Steps to get a home loan in a trust

Speak to a broker

Speaking to a broker early on can help you get an estimate of your borrowing capacity both inside and outside of a trust. This will give you a clearer picture to make better decisions.

Speak to your accountant/Lawyer

Your accountant or lawyer will guide you through the types of trust structures that suit your needs, the tax implications now and in the future, fees involved in setting up and maintaining the trust.

Set up the trust

Formally establish the trust and appoint the trustee. This step is critical because the trust must be set up before applying for a pre-approval.

Pre-approval

Pre-approval allows you to know how much you can borrow and helps streamline the purchase process when you find the right property.

Look for a property

You can search for a property on your own or get help from a buyer's agent.

Formal approval

Submit your signed Contract of Sale to the lender for formal approval, and then complete the loan contract signing process.

Settlemment

After the lender receives your signed loan documents, they will release the funds, finalising the property purchase and transferring ownership to you.

Who Is the Borrower?

Corporate Trustee : If you have a corporate trustee, the trustee company itself becomes the borrower both in its own right and as the trustee of the trust. The individuals (typically you and/or a spouse) act as servicing guarantors, meaning their incomes are used to demonstrate loan affordability.
Individual Trustee: For an individual trustee, the individual becomes the borrower in their capacity as trustee for the trust.

Who Is the Purchaser?

While it may seem straightforward that the purchaser would be the trust, the legal setup is a bit more complex. Since a trust can’t own property directly, the trustee acts on its behalf in the transaction. ATF stands for ‘As Trustee For’. Here’s how it typically appears:

Corporate Trustee

The contract should state something like “XXX Pty Ltd ATF XXX Trust.”

Individual Trustee

The purchase is listed as “John and Marry Smith ATF XXX Trust.”

Alternative Option

If the trust setup isn’t complete, you may list “John Smith or Nominee” as the purchaser, then later nominate the trustee on a Nomination Form. It’s wise to consult with your solicitor if using this approach.

Required Documents for a Home Loan in a Trust

In addition to standard documents for a home loan, you'll need:

Certified Trust Deed:Keep the certified copy safe, as replacing it can be challenging. Certificate Of Duty:Required in some states to show that duty was paid during the trust setup. Trust Vetting Fee:Many banks charge a small fee, typically around $300, for verifying trust documents.

Where should you start?

At North Rocks Mortgage Solutions, we understand that navigating property purchases through a trust can be complex. We’re here to guide you every step of the way, ensuring you make informed decisions that align with your financial goals. Whether you’re just starting out or looking to expand your portfolio, we can help you explore the best options for your unique circumstances. Get in touch today to schedule a consultation and discover how we can assist you in achieving your property investment goals. You can reach me, Cordelia, directly at cordelia@northrocksmortgage.com.au or call 0433 035 911.

Author:

Cordelia Jia

Founder & Finance Broker

Cordelia holds a Master of Professional Accounting and a Diploma of Finance and Mortgage Broking Management. With over a decade of experience in the financial service industry, she is a seasoned expert and a reliable partner in navigating your loan journey.

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