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Don’t buy property in a trust before reading this

ByAndrew Mirams

There’s been some big changes in the lending market recently, and I don’t mean trimmed interest rates, stubborn inflation, or government policies. The changes I’m talking about are those that will directly impact residential lending where a company or trust is involved.The first shifts were announced by Macquarie Bank in late October last year, and the CBA and ANZ were quick to follow suit. Westpac and non-bank lender Firstmac were the latest to change tack on trust loans this January, making NAB the only Big 4 Bank still safe for trust loan borrowers… for now, at least.

What is a trust?

The Australian Tax Office describes a trust as an obligation for a person or other entity to hold property or assets for beneficiaries. A good example of a trust is one in which assets are set aside for a child’s education or basic care. The person doing this will choose a single trustee or a group of several people, such as a company, to manage these finances on the child’s behalf. As the beneficiary, the child will receive these funds at a certain age or time.One of the most common trusts is a discretionary trust, also known as a family trust. In this case, the trustee decides how much income each beneficiary receives. Another common trust is a unit trust, which sees beneficiaries receive a fixed amount of an asset, based on the number of units they hold in the trust.

How trusts can help property buyers

Family trusts are commonly used by beneficiary investors to purchase property, although owner-occupiers can utilise them too. The important point about these purchases is that the property’s legal owner is the trustee – not the beneficiary.  

Trusts are most commonly used by people for 2 important reasons. Firstly, it provides asset protection for the clients as the trust is a separate legal entity. This is common for doctors, lawyers, accountants or other professions that could be subjected to litigation or being sued, which would put asets in their personal names at risk if legal action was successful.

The second is to pass an asset from generation to generation as with a trust, you don’t need to sell or transfer the ownership of the title, you can simply make changes to the trust deed amending the beneficiaries and the company trustee directors to pass on an asset.

Taxation benefits can further boost this. For example, trustees may decide to assist beneficiaries by choosing how to divide trust income, based on who will be most affected by tax rates and similar issues. In this way, beneficiaries can also enjoy capital gains tax concessions.

Trust loan changes: new lender rules

As mentioned above, NAB is the only Big Four Bank still holding back on trust loan variations. I spoke to an NAB state manager recently and was told no reviews of trust loan guidelines had been flagged at that time.

But when Australia’s biggest bank, CBA, pulls out of a particular market, the ripples flow elsewhere, putting pressure on the system. The CBA was certainly the first of the major lenders to announce trust loan transformations on November 21.

The bank will no longer accept new trust loan applicants; instead, applicants must be existing CBA loan clients. Even these existing customers must have held a home or investment loan, a personal loan, or a credit card for at least six months to be considered for a trust loan.

Macquarie Bank’s trust rules are even tougher, and not just because it was the first lender to introduce changes on October 31. The bank will no longer accept trust loan applications, and current borrowers have been told they will need to refinance if they want to vary their loan. 

The flow-on effects continued with Westpac the next big bank to drop trust loan applicants on December 11, or some of them at least. While Westpac will still accept new trust loan applicants, these loans are now limited to self-employed and private wealth customers. Existing customers must also have banked with Westpac long-term.

ANZ’s trust loans will also be open only to its current customers. These customers must either have held a lending product with ANZ for six months or a transaction account for 12 months or more. Plus, ANZ’s trust loan LVR is restricted to 70 per cent.

Then, there’s Firstmac’s trust loan procedures, published on January 16. The first non-bank lender to announce such restrictions, Firstmac will now only allow trust and self-managed super fund loans from corporate entities, with new loan applications from individuals no longer accepted; however, extra loans or advances from existing customers may be allowed. Accountant guarantee letters, or similar guarantor offerings, for trust-held positively geared property will no longer be accepted either.

What do trust loan changes mean for buyers?

For investors who often depend on trust financing to purchase property, the reduction in available lenders will make trust loans more expensive. Don’t expect the same rates as personal lending, as higher interest rates will certainly apply, thanks to less competition.

Trust loan holders will likely also experience harsher capacity tests and longer turnaround times. Loan-to-value ratio (LVR) restrictions have already begun under ANZ’s guidelines, and so too have more restrictive servicing tests.

In more bad news for trust loan borrowers, equity releases from a trust will be almost impossible. And lenders are clearly willing to lose business rather than support existing clients. Macquarie Bank has already flagged that it would prefer its trust loans to be refinanced to other lenders, rather than helping its current borrowers.

So, don’t be surprised if we see further restrictions in the future.

Why are lenders changing trust loan rules?

These trust loan revisions are due to long-standing issues that have simmered in the background of lender rules and regulations for years. Put simply, lenders don’t like trust loans. They’re risky and legally complicated, and for lenders, this means a higher capital cost and more stringent accessibility rules.

So, all the recent trust loan moves appear to point to lenders wanting to simplify their inflows of certain types of lending, such as investment lending. Last but not least, finance regulators, ASIC and APRA, already have trust loans in their sights, to reduce investor lending to within their caps range and try to cool the market.

Talk to a mortgage broker

Taking out a trust loan has become more difficult, but it’s not impossible. Whether you’re an existing loan holder or planning to apply for a new loan, the Intuitive Finance team can walk you through the recent changes to ensure you know your options.In our complimentary strategy sessions, we’ll review your goals, rates, income and more, to help you enjoy your trust fund in a way that continues to benefit you and your family.

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Andrew Mirams
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