how does a discretionary trust borrow money?

Can someone please explain to me how do loans work with a discretionary trust?

If a trust wants to purchase a property, I can understand a proportion will be based on the value of the property and a deposit will be required.

but does the bank look at serviceability? how does this work, is it based on the beneficiaries serviceability?
We had a personal loc and put money in the trust for the deposit .

The banks look at rent and then the serviceability of the beneficiaries .

They may want personal guarantees . Will depend on the rules of the banks and how much assets the trust have.

Interesting thing we will have to look at is that our kids are beneficiaries in our current trusts. Before they were all under 18 and now all over . I've been told they may want guarantees of the kids which wouldn't work for us or them as it would limit their ability to borrow .


Serviceability comes from outside the trust

usually trustee guarantees if personal trustees, OR directors of the coprorate trustee

Limited recourse with standard DTs and 80 %resi lending I believe is generally not possible for normal portfolios

Essentially the trustee borrows the money. Ideally this would be a trustee company, so the directors would sign personal guarantees.

There are exceptions, but usually servicing is based on the trustee or directors financial position, so this tends to include any loans they've got personally or have guaranteed (such as other properties in the trust). In some cases lenders will also want personal guarantees from any other adult beneficiaries, which can get incredibly complex, so we simply avoid the lenders that work this way.

In essence it's a bit like a personal loan application, but often with a bunch more paperwork involved. There's also a few potiential policies to be navigated around, but once you understand these, it's just a matter of working the best solution.
The trust isn't a legal person so it cannot borrow money. It is the trustee that is the legal person and he/she/it enters into a contract with the lender to borrow. This is done in their capacity as trustee of the trust

To be able to borrow the trust deed needs to specifically allow the trustee to borrow and to allow trust property to be mortgaged. If the deed doesn't specifically allow this the trustee will be in breach of the terms of the trust and this will create problems as they will be personally liable for the the debt without recourse to the trust assets.

From the lender's perspective they will have to see the deed allows borrowing etc. They will also want the trustee to do the borrowing with any directors of the trustee company, and sometimes shareholders, guaranteeing the loan.

So if Mr X is director of XXX Pty Ltd and this is trustee for the XX Trust then Mr X will be required to guarantee the loan and his personal income will be used to assess serviceability. Any potential rent or existing rent received by the trust will be taken into account too.

As for deposit, you should not just use a LOC in your personal name without considering the implications. Are you lending the trust (trustee) money or gifting it? Tax implications, asset protection implications and estate planning implications. Whatever you choose you should make sure it is properly documented to avoid disputes later on.