In this reel, part of our series on trust borrowing, Marty talked about how some investors buy property through more than one trust as part of a portfolio strategy. It’s a topic that gets a lot of attention online, sometimes described as a “loophole”. We’d describe it more carefully. It isn’t a loophole. It’s a question of lender credit policy, and those policies vary a lot between lenders and change over time.
The general idea
When you buy an investment property in your own name, the loan generally counts against your personal borrowing capacity for the next purchase.
When a property is bought through a trust, such as a discretionary trust with a corporate trustee, the loan sits with the trust. You, as an individual, usually give a personal guarantee. How a lender treats that guaranteed debt when you apply for your next loan depends on the lender.
As described in the video, some lenders may, in certain circumstances, assess an existing trust loan differently. For example, they may take into account that the trust’s own rental income services its own debt. In those cases, an investor’s personal borrowing capacity may be assessed much as it was before the earlier trust purchase. The video discusses repeating this through additional trusts, provided your personal finances stay solid and rental income covers the repayments.
Important caveats
We want to be very clear about the limits:
- Lender policies vary. Many lenders include the full guaranteed liability in your assessment, as if the debt were your own. Only some lenders may assess it differently, and their criteria can be strict.
- Policies change. A lender’s approach today may not be its approach next year. Nothing about future borrowing capacity is guaranteed.
- You are still liable. A personal guarantee means that if the trust can’t meet its repayments, the lender can pursue you personally.
- Rental income isn’t guaranteed. Vacancies, rate rises, repairs and market changes can all affect whether a property pays its own way.
- Each loan is assessed on its merits. Every application must meet the lender’s requirements and responsible lending obligations.
Costs and complexity
Trusts aren’t free to set up or run. There may be establishment costs, annual accounting and tax returns, ongoing trustee obligations, and land tax or stamp duty treatments that differ from owning in your own name. In some states, land tax for trusts can be quite different. A trust also needs a properly drafted deed that suits what you’re trying to achieve.
That’s why we always recommend getting advice from a qualified accountant and a solicitor before setting up a trust for property. As brokers, our role is the lending side: understanding how different lenders may view your structure.
Who might consider it?
A trust-based approach may suit some experienced investors with strong, stable personal finances, a long-term plan and good professional advisers. It’s generally not a shortcut for someone who is already stretched.
How we can help
If you’re considering a trust structure, or already have one, we can talk through how different lenders may assess your situation and work alongside your accountant and solicitor. Outcomes depend on your individual circumstances and on the lender’s assessment at the time.
This is general information only and does not take into account your objectives, financial situation or needs. Speak to a broker before acting.