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  • Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Trust Strategies to Increase Borrowing Capacity

    Here are a few of examples of how using a discretionary trust can increase borrowing capacity.

    Example 1
    Trust is set up to own property. Property increases in value. But the director of the trustee has suffered a credit blemish and no lender will lend.

    Solution – change directors!
    Get legal advice first!

    Example 2
    Trust is set up to own property. Property increases in value. But the director of the trustee no longer is able service with just his income and the trusts rental income.

    Solution – bring the spouse on as a guarantor. You could do this with properties in personal names as well.

    Solution 2 – bring a friend on as a guarantor. The friend may need to be a beneficiary of the trust and/or a director of the trustee.

    Get legal advice first!

    Example 3
    Trust is set up to own property. Property increases in value. The director of the trustee suffers a court judgment and no lender will lend to him. If this was a property in his own name he would be stuffed for 5 years but with a trust there is a simple solution:

    Solution

    Director causes spouse/friend to be appointed director and then resigns. The loan is then refinanced with the new director providing a personal guarantee.
    Get legal advice first!

    Example 4
    A trust is set up to own property and loans are obtained with personal guarantees from person A who is the director of X Pty Ltd the trustee.

    After a while person A sets up a new trust with a new company Z Pty Ltd as trustee and himself as director. Person A does not tell the new lender about the personal guarantees he has given to the lender for the first trust. Since the new company, Z Pty Ltd, is a separate legal entity to the first company X Pty Ltd, its debts need not be disclosed.

    If the lender asks person A about any personal guarantees he has given he should disclose those guarantees. If the lender does not ask person A need not disclose. Thus the borrowing capacity could be increased by setting up new entities.

    This method has been promoted by a certain property author and criticised by various brokers, including myself in the past because the new lender would know about the personal guarantees given by person A as there would be a record on A’s credit file. However as time passes these credit file hits become less of an issue and will disappear from the file after 5 years.
    Get legal advice first!

    Example 5
    For a person with a credit blemish a Fixed Unit Trust could be set up to own property with person A owning the units of the trust and person B being the trustee.Person A would be the one with the blemish and once that disappears person A could become the trustee and the beneficial and legal interests would merge and the trust disolve – probably without CGT and stamp duty if set up correctly.
    I did this years ago for a client with a loan involved and the lender did not check the trust deed very well and approved the loan on the basis of the income of person B only.

    Example 6
    Very similar to the above. Person A acts as trustee for person B. B has the credit blemish in this case and the bank will lend on the basis of A being the legal and beneficial owner of the property.

    At a later date title could be transferred without stamp duty and CGT being triggered if set up correctly.

    This is a bare trust arrangement.

    =

    But before doing anything described above each person and the trustee should seek legal advice as there are various legal implications involved.

    To be balanced, here are some ways a trust can hinder borrowing capacity.

    Example 7
    The property’s rent is less than the interest on the loan.

    Lenders will not be able to use negative gearing addbacks because the trust has no other income and it does not pay tax. This will reduce serviceability slightly.

    Example 8
    The property has a taxable loss of $10,000 per annum.

    This could potentially save the individual $5,000 per year in tax but would result in a $10k carried forward loss for the trust with no immediate tax benefits unless the trust had other income.

    This has 2 effects
    1. Less cash to pay down non-deductible debt
    2. Less cash flow making it slower to build equity.

    Trusts are complex legal arrangements so see your lawyer before attempting any of this on your own.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Excellent post, Terry! Thank you! 👍😎

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of AngleneAnglene
    Participant
    @anglene
    Join Date: 2015
    Post Count: 1

    Thanks terry.

    This is very helpful. I am trying to set up an entity to get my first loan.

    My affordability is a proble for me so i am thinking of setting up a pty ltd toincrease my affordability with my lender.

    Thanks.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Thanks terry.
    This is very helpful. I am trying to set up an entity to get my first loan.
    My affordability is a proble for me so i am thinking of setting up a pty ltd toincrease my affordability with my lender.
    Thanks.

    If affordability is a problem it’s likely that adding the trust in will reduce it even further. The scenarios Terry has given above largely shows fringe scenarios which a trust could provide niche benefit (and in quite a number of those scenarios a trust is not required to use those benefits).

    You’re more likely to hinder than help your borrowing capacity to increase your borrowing capacity by utilising a trust for any vanilla non credit impairment/change in circumstances deal.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Thanks terry.
    This is very helpful. I am trying to set up an entity to get my first loan.
    My affordability is a proble for me so i am thinking of setting up a pty ltd toincrease my affordability with my lender.
    Thanks.

    How do you think this will increase your affordability?
    (see the last section of my post).

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of NaomiNaomi
    Participant
    @missoscar
    Join Date: 2017
    Post Count: 3

    Hi! I’m new to this website but this is a really helpful page – thank you!!

    Profile photo of fxdaemonfxdaemon
    Participant
    @fxdaemon
    Join Date: 2013
    Post Count: 113

    Hi Terry,

    Can a trust or a corporate trustee ever be a guarantor for another trust?
    Meaning, if person A is a director of corporate trustee X (for family trust XX)
    and is also a guarantor for X itself. When X becomes profitable further down the road,
    can it then be the sole guarantor for a new trust YY for financing new property
    purchase or development without same person A as guarantor as A is also the director
    if YY’s corporate trustee Y?

    Thanks,
    FXD

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    A trustee can give a guarantee for another trust, if the deed permits. But a lender will nearly always require a personal guarantee from a human person.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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