All Topics / Finance / Home Loan Borrowing using Trust

Viewing 16 posts - 1 through 16 (of 16 total)
  • Profile photo of psrpropertypsrproperty
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    @psrproperty
    Join Date: 2020
    Post Count: 3

    Hi all,

    After reading Steve McKnight’s book about putting the name under Trust structure instead of under personal name.

    Can I please ask people who have borrowed home loan using Trust structure from the banks, how was it done?

    Do you approach personal home loan unit or commercial lending unit in the bank?

    Appreciate some guidance.

     

     

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Trusts are not legal entities so cannot borrow. It is the trustee that borrows, in their capacity as trustee.

    Most banks will lend at normal rates and terms to trustees, whether they are individuals or companies. Residential loans in most cases.

    If a company all the directors will need to give a personal guarantee.

    If a trustee is borrowing the lender will need to review the trust deed and make sure the trustee has the power to borrow, to mortgage trust property and to be indemnified out of the trust assets.

    Trustees of discretionary trusts and unit trusts are able to borrow, but not bare trusts – or no lender would lend to a bare trustee if they know they are acting as trustee.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of rliwanenrliwanen
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    @rliwanen
    Join Date: 2021
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    The claims in the book and what Mr. Terry seems to be exact oposite. Can Mr. Mcknight please shed some light on this matter. We would like the idea of what is taught in the book but a lawyer says otherwise.

    Profile photo of TerrywTerryw
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    @terryw
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    What does the book say?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of rliwanenrliwanen
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    @rliwanen
    Join Date: 2021
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    Hi all, After reading Steve McKnight’s book about putting the name under Trust structure instead of under personal name. Can I please ask people who have borrowed home loan using Trust structure from the banks, how was it done? Do you approach personal home loan unit or commercial lending unit in the bank? Appreciate some guidance.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    That is probably just loose wording. People talk about trusts borrowing all the time, but when you dig down it is the trustee borrowing in their capacity as trustee.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Rliwanen,

    You say this:-

    “The claims in the book and what Mr. Terry seems to be exact oposite. Can Mr. Mcknight please shed some light on this matter. We would like the idea of what is taught in the book but a lawyer says otherwise.”

    I have always thought chapter 9 of the updated “0 to 130 properties” is very well written and quite complete.  But you do need to read and assimilate ALL of it, as there is so much information to be absorbed.   Like Terry says, it is possible that “the wording is loose” in legal terms but I, as a regular reader with no legal training saw no such contention.

    My take on the words “putting under a Trust structure instead of personal name” might confuse someone if they already have a Trust with themselves as trustee (i.e. the Trust is administered by themselves under their personal name).  From what I recall of chapter 9, Steve does not use that structure, but instead has a Company acting as trustee of the Trust.

     

    To take this further, and to provide more clarity, please identify just which words you are reading that have you saying “The claims in the book and what Mr. Terry seems to be exact oposite” and “a lawyer says otherwise”.   Once we know just where your concern lies, we can better shed some light on it.

    Other than that, DO re-read all of chapter 9 slowly, carefully, and completely – it may just answer all of your questions.  ;)

    Benny

    Profile photo of TerrywTerryw
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    @terryw
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    When a person acting as trustee borrows they are the borrower, personally liable and indemnified out of the trust assets. If things go wrong their personal assets are at risk.

    When a company is acting as trustee it will be the borrower, the company personally liable for the debt and indemnified out of the trust assets. If things go wrong the company’s personal assets will be take risk – that is why company trustees generally don’t have any assets.

    The shareholders cannot be liable for the company debt and even the director is not personally liable – but there can be ways they are tied in to become liable.

    All this changes though when guarantees are given. Under a guarantee the guarantor is contracting to make themselves personally liable to pay the debts of the company – both personally and in its capacity as trustee, but only if the company does not, or cannot pay them. This is a contingent liability.

    This means that when a company borrows, whether in its own right or as trustee, the debt is not a debt of the person.

    If they go and borrow separately this is not their debt. If they set up a second company the debt of the first company is not debt of the second company – no connection, other than via the personal guarantee.

     

    This is the issue though:

    Some lenders, most lenders, tread guarantees the same as borrowings for serviceability.

     

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
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    Well, I greatly respect Terry as a lawyer, but to be fair to me, 0 to 130 is not a text book on trusts.

    Instead, it explains the concept of how I have used (and continue to use) a multi trust structure to leverage my personal borrowing capacity.

    Everything written in the book is both factual, and accurate.

    Oh, and for the record, NOTHING that Terry has said is at odds with what was outlined in the book.

    – Steve
    BA Bus (Acc), CA, 30+ years accounting experience, 20+ years investing experience, 1000+ property transactions, borrowed millions using multi-entity structures.

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Terry,

    “Some lenders, most lenders, treat guarantees the same as borrowings for serviceability.”

    That is an interesting point – a lot like when lenders assess credit card limits – the borrower is deemed to be borrowing up to the limit, even if they owe nothing to the credit card company.

    So, the way out of that is what?   I would think the history of the borrower and their structure would be key here, yes?  e.g.  Someone who has borrowed for years using Companies heading up Trusts, and those companies have always made a profit, and there has never been a need to call on any guarantees made to support these Companies’ borrowings.   Surely that manager is seen to be doing a fine job, and borrowing will likely mean more profits once again, so the lenders will likely smile on them?

    Is it simply a matter of “don’t try to run before you’ve learned to walk”.   Where does the would-be investor start?  How do they get their first Trust operating?  Is it only with a personal guarantee from them initially?   And then, how do they get the next one?  Is it by proving their worth over time?

    What say you Terry?

     

    Edited in later – thanks for your words Steve.   Your path has been an inspiration to me over many years, and that chapter 9 is a big one in my book.  I hope the original poster can see a path for themselves after hearing those words from you.  It is relevant to note that none of Terry’s words are at odds with your book (which is pretty much as I had thought anyway) – always good to hear it from the horse’s mouth though – thanks !!  ;)

    Profile photo of psrpropertypsrproperty
    Participant
    @psrproperty
    Join Date: 2020
    Post Count: 3

    Thanks respectful posts and comments to clarify the answers to the original posts.

    To exercise an example that may be more relevant to someone who wants to start off in buying property using company trustee trust structure. Say if the sole company director (so sole guarantor in this case) has 10 properties, and he only puts 2 properties as assets for the guarantees. In the event of company bankrupt, does it mean creditor can only chase the guaranteed 2 assets, or can creditors reach as far as the other 8 assets since they are owned by the guarantor of the company being sued?

     

    Thank you.

    Profile photo of rliwanenrliwanen
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    @rliwanen
    Join Date: 2021
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    Thank you Benny for your generous reply. I will take your advice and through it all again. 

    I hope you wouldn’t mind if I seek further clarification.

    Also thank you Terry. By the way Terry I e-mailed you with regards to restructuring.

    Ronan

     

     

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
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    Hi rliwanen,

    “I hope you wouldn’t mind if I seek further clarification.”   Indeed, that is why we are here, so feel free.  We don’t learn to ride a bike the first time we are on it, but we get there with a bit of help !!

    Benny

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Is it simply a matter of “don’t try to run before you’ve learned to walk”. Where does the would-be investor start? How do they get their first Trust operating? Is it only with a personal guarantee from them initially? And then, how do they get the next one? Is it by proving their worth over time? What say you Terry?

    I think you have confused things a bit Benny

    A trust is not a legal entity, it is just a relationship. But for tax purposes a trust is treated as a separate entity.

    So when a company borrows as trustee to buy real estate, it will be the trust the claims the interest and receives the income. The company is only the legal owner and the legal borrower – but it will have a nil tax return.

     

    If someone wants to maximise borrowing capacity, for themselves and related entities they would generally want to

    a) use a corporate trustee as the borrower, or a company in its own right as the borrower.

    b) carefully consider who should be the director as this will determine who the guarantor will be in most cases. Guarantees are unavoidable

    c) work with a broker to avoid using certain lenders right up front.

    d) once borrowing cap reached, then set up a new company to either act in its own right or as trustee for a different trust

    e) repeat.

     

    But there is a lot more to it. Legal advice is needed on the legal issues such as whether to use a trust or a company to hold property as there are different tax, estate planning, asset protection and land tax issues. Consider the risks of guarantees and who should be the guarantor.

    Consider how equity will be borrowed against – Company A cannot generally borrow against Company B’s properties. Banks won’t want to lend to Company A if Company B will be using the money either.

    And I should also point out that I am not disagreeing with Steve on this either. I don’t see how what I have written conflicts with what is in his book – but I haven’t had a relook at it for several years.

    I am a lawyer specialising in trusts and structuring and have 2 masters degrees, and am also a chartered tax advisor CTA, and a mortgage broker with a credit licence too. I have owned a few properties in my time too.

     

     

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    To exercise an example that may be more relevant to someone who wants to start off in buying property using company trustee trust structure. Say if the sole company director (so sole guarantor in this case) has 10 properties, and he only puts 2 properties as assets for the guarantees. In the event of company bankrupt, does it mean creditor can only chase the guaranteed 2 assets, or can creditors reach as far as the other 8 assets since they are owned by the guarantor of the company being sued?

    I think you are misunderstanding the guarantee here. There are 2 types of guarantees

    a) security guarantee where property A is used as security for a loan to buy property B.

    b) income guarantees where a person’s income is taken into account for a loan with someone else as the borrower.

    Here we are talking about income guarantees. A brand new company will not have any income of its own so the lender will rely on the director to pay its loans for serviceability reasons. If for whatever reason the company cannot pay its debt the lender will have a mortgage over the property owned by the company. This enables them to take possession of the property and sell it to recover their money. If this is not enough they will go after other assets of the company (and trust if company was acting as trustee) and/or the assets of the guarantor – they will ask the guarantor to repay the loan first though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Terry,

    Thank you for such a full explanation of what can be a confusing subject for many (myself included).  Thanks to Steve too, and to those who have proposed the questions that led to this learning.  Good stuff,

    Benny

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