Getting Finance through Trusts and LMI

[SYD2013]

Hi Guys

I have been doing some research and this site looks really handy/useful! So thanks for all the great contributors.

I have a number of properties with a major lender and was looking at getting to a seperate lender for a number of reasons (asset segregation/protection being one of the main ones). I have stuck with my Bank for a while given they have been good to me and given me a competitive rate.

I have reached the Land Tax threshold in NSW and was therefore looking at a Trust. I have got some initial advice/feedback re the C&N Property Investors Trust. I like the look of it given it gives you asset protection as well as the ability to pass it down the family in years to come and also claim the Negative Gearing as an individual (a kind of hybrid truct but there is a tax ruling and seems good structure planning if set up correctly).

If I therefore go ahead with the PIT will it be difficult to get finance (obviously harder than individual but probs doable given financial situation) and/or will the rates be similar to buying in other names?

I would prefer a 10% deposit with no LMI but looking through other threads this seems unlikely so potentially 20% deposit would be paid - this should allow me to have a better LVR and better servicing ability. The guys at C&N told me to go to C&N Finance who are mortgage brokers specialising in Trusts etc just not sure if independant. Do any other Brokers look at/specialise in financing trusts and in particular the PIT as it seems to be quite popular (not main stream but its out there!).

Thanks
SYD

 

[Terry_w]

Hi Syd,

I am a solicitor and a broker specialising in trusts. I think you will find there are generally few issues in getting finance with a trust structure. However if you are talking about getting the loan in an individual's name with the security owned by a company as trustee then this is when difficulties can arise.

Trusts are legal relationships so you should speak to a solcitor, especially about the asset protection and land tax issues. You should seek legal advice on these and other issues in relation to setting up of trusts.

 

[SYD2013]

Hi Terry

I unerstand the PIT's are set up so the loan is in the individual's name to ensure deductibility. I have discussed this with C&N and they are of the opinion this happens all the time and they have a number of lenders that lend to these trusts who are now more comfortable with the scenario aftetr this Product Ruling from last year.

SYD

 

[Terry_w]

Hi Terry

I unerstand the PIT's are set up so the loan is in the individual's name to ensure deductibility. I have discussed this with C&N and they are of the opinion this happens all the time and they have a number of lenders that lend to these trusts who are now more comfortable with the scenario aftetr this Product Ruling from last year.

SYD

Yes, there are a number of lenders willing to lend this way, even for other trusts without a ruling.

 

[SYD2013]

Is it less likely to get a lend on a 10% deposit under a trust of this nature? Perhaps one of the disadvantages of using a trust (ie you must have 20% deposit or are you seeing most lenders still requiring a 20% deposit?).

 

[Terry_w]

Is it less likely to get a lend on a 10% deposit under a trust of this nature? Perhaps one of the disadvantages of using a trust (ie you must have 20% deposit or are you seeing most lenders still requiring a 20% deposit?).

It will certainly be more difficult because LMI will be involved.

 

[Peter_Tersteeg]

I'm a little sceptical of the PIT. It's a twist on the Hybrid trust and whilst I've every confidence in Chan & Naylors private tax ruling, I'm a little concerned that the asset protection it provides isn't as robust as other trusts.

I think you'll also find that the number of lenders willing to use this form of trust is extremely restricted. I can think of 2 immediately that would probably be okay with it and could probably find about another 2-3 if pressed. Involving LMI could make it even harder. That said it's a far cry from a discretionary trust that almost every lender will accept. This can have a very negative impact on your future investment strategy.

 

[Aaron_C]

Why complicate things?

 

[SYD2013]

I guess trying to avoid putting things in personal name whilst still working to both get the negative gearing benefits and asset protection. Given I am looking at houses in SYD (600-900 bracket) there will likely be a shortfall which is harder to carry in the short-term if I were to use say a Disc Trust.

 

[Rolf Latham]

I guess trying to avoid putting things in personal name whilst still working to both get the negative gearing benefits and asset protection. Given I am looking at houses in SYD (600-900 bracket) there will likely be a shortfall which is harder to carry in the short-term if I were to use say a Disc Trust.

The challenge is that only a few lenders will take the PIT/HDT on anyways.........

Not saying it cant be done, have done a few, im always concerned where a service provider suggests an additional in house provider - in theory this can be very convenient, however some comments from clients have revolved around the fact that if the product needs a niche broker ...............

ta
rolf

 

[Aaron_C]

But it is stupid to do that if you can't get finance or limit your finance options?? Think big picture. Do you need asset protection? With LMI the bank owns all the equity anyway plus your personal guarantee...

 

[Rolf Latham]

Is it less likely to get a lend on a 10% deposit under a trust of this nature? Perhaps one of the disadvantages of using a trust (ie you must have 20% deposit or are you seeing most lenders still requiring a 20% deposit?).

LMI for Traditional HDTs is near impossible......, and yes the PIT can be massaged more easily than an older HDT with no specific ruling, still no walk in the park.

I have a HEAP of legacy structures in my client base from the early naughties where HDTs were common and quite reasonably accepted


ta
rolf

 

[SYD2013]

Would you continue to buy in personal name?

What about estate planning? I know this is a long way away but you always see the big players in town with trusts etc and nothing owned in their own name (or so it seems?).

 

[Rolf Latham]

Would you continue to buy in personal name?

What about estate planning? I know this is a long way away but you always see the big players in town with trusts etc and nothing owned in their own name (or so it seems?).

more of our clients are using specialised unit trusts - yes little asset protection and other challenges, but generally more amenable to get a balance of lendng

Estate and asset planning isnt my area of licencing, all I know is that its quite hard to get all those benefits and Neg gearing, AND boiler plate surety that "he will all be right mate" case law.

The more convoluted structures become, the less trusting lenders become

ta

rolf

 

[Aaron_C]

I know this is a long way away but you always see the big players in town with trusts etc and nothing owned in their own name (or so it seems?).

There is the distinction. Big Players. When you are dealing with multi-millions/billions of assets, then trusts become very important. For your small little house in St Marys? I doubt it.

 

[Colin Rice]

The more convoluted structures become, the less trusting lenders become

Can also fall into the "too hard" basket.

 

[Terry_w]

Would you continue to buy in personal name?

What about estate planning? I know this is a long way away but you always see the big players in town with trusts etc and nothing owned in their own name (or so it seems?).

what sort of things do you have in mind here? owning in your own name would enable the passing of the assets to a discretionary testamentary trust which would offer asset protection and tax advantages superior to a normal discretionary trust -albeit not to you but to your family after your death.

consider a fixed unit trust in addition to the above. Units could be willed to a discretionary testamentary trust with all the advantages above. In the meantime, while waiting to drop dead, you may even be able to take advantage of selling the units to a SMSF, getting acccess to your super and use that to pay off your non deductible mortgage.

 

[Aaron_C]

Can also fall into the "too hard" basket.

Yeah....banks hate nothing more than regulatory risk. All you need is for the ATO to rule that these hybrid trusts are non complying and slap on penalties and interest to boot, plus clawbacks. No wonder why LMI won't touch them. Seriously, people worrying about some small miniscule risk of being sued and stuff up their investment plans in the process - I find it ridiculous.

 

[SYD2013]

Asset protection is not my main concern.

More interested in the NG at the early stage of my investing career which limits trusts you can use. Can you use fixed unit trusts to get these advantages?

I am not averse to using personal name as not in high risk job but just think good idea to not have name on too many titles.

 

[Terry_w]

Asset protection is not my main concern.

More interested in the NG at the early stage of my investing career which limits trusts you can use. Can you use fixed unit trusts to get these advantages?

I am not averse to using personal name as not in high risk job but just think good idea to not have name on too many titles.

Fixed trusts are the only trusts that enable negative geared and that is because you need to borrow to buy the units to get the deductions in your own name. there must be no discretion for the trustee to vary this otherwise the interest would not be deductible in full.