Serviceability and trust lending

[golazo]

Hi guys,

Long time viewer of the forum and am hoping that there are some experts who might be able to help me out with my query. I have had many questions already answered just by browsing through countless threads so thank you to the SS community for the useful content.....

Hoping to get some insight into trust lending and how it may positively or negatively effect serviceability later down the track. I can briefly go through my personal scenario but this question can probably be applied in general terms as well. Any help/advice would be much appreciated....

Currently living at home with parents however have a partner who is also living at home with her partners. Have recently settled on an IP joint 50/50 TIC in our personal names that is positively geared after expenses but before depreciation. We are now looking at buying a development site which will include myself, my partner and her brother all on the loan application/title. Plan is to purchase site with 3 unit development potential and split accordingly once completed. My partner and I would like to hold onto our two properties if possible, not fussed what her brother does. We are planning to do this under a trust structure of sorts (yet to specify exactly how as it is only early stages).

Basically, four key questions I am hoping to clear up with regards to trusts and serviceability.

1. From what I understand, serviceability for the trust is based on the trust beneficiaries verifiable income (our employment income) plus potential new rental income?

2. Lets say our current IP is with Bank A and we apply for the development project loan under a trust structure with Bank B, I'm assuming my partner and I would need to disclose our personal liability with our IP debt at Bank A?

3. Lets say our current IP is with Bank A and we get our development project loan under a trust structure with Bank B, if I wanted to buy another IP with Bank C in both my name and my partners personal name, would the debt/income held under the trust with Bank B need to be disclosed on that loan application given that the trust would have an ABN and be considered business expense and therefore not on personal home loan application with Bank C?

4. Lets say our current IP is with Bank A and we get our development project loan under a trust structure with Bank B, if I wanted to buy another IP with Bank C in another trust structure between myself and my partner, would the debt/income held under the trust with Bank B need to be disclosed on that loan application given that the trust would only consider my partners personal income and my personal income as the serviceability for that new trust application with Bank C?

Other side notes, with the trust purchase we have adequate cash holdings to have lending at 80% which I'm assuming will avoid the need for any LMI or any guarantees held for the trust debt. I'm primarily after just confirming what the serviceability issues are first and then this will bring up more specific questions with regards to appropriate structures etc. Please note, the purpose of this question is to see how to maximise my serviceability using trust structures not so much in regards to asset protection or anything like that.

Hopefully these questions make sense, any help would be much appreciated!

 

[Rolf Latham]

Hi guys,

Long time viewer of the forum and am hoping that there are some experts who might be able to help me out with my query. I have had many questions already answered just by browsing through countless threads so thank you to the SS community for the useful content.....

Hoping to get some insight into trust lending and how it may positively or negatively effect serviceability later down the track. I can briefly go through my personal scenario but this question can probably be applied in general terms as well. Any help/advice would be much appreciated....

Currently living at home with parents however have a partner who is also living at home with her partners. Have recently settled on an IP joint 50/50 TIC in our personal names that is positively geared after expenses but before depreciation. We are now looking at buying a development site which will include myself, my partner and her brother all on the loan application/title. Plan is to purchase site with 3 unit development potential and split accordingly once completed. My partner and I would like to hold onto our two properties if possible, not fussed what her brother does. We are planning to do this under a trust structure of sorts (yet to specify exactly how as it is only early stages).

Basically, four key questions I am hoping to clear up with regards to trusts and serviceability.

1. From what I understand, serviceability for the trust is based on the trust beneficiaries verifiable income (our employment income) plus potential new rental income?

yes, YOUR portion of the rent, but the fulll liability of the loan, for almost all lenders

2. Lets say our current IP is with Bank A and we apply for the development project loan under a trust structure with Bank B, I'm assuming my partner and I would need to disclose our personal liability with our IP debt at Bank A?

Personal liability yes. A couple of lenders allow you to not declare asset income or liability for contingent liabilities such as guarantees provided to a company or corp trustee

3. Lets say our current IP is with Bank A and we get our development project loan under a trust structure with Bank B, if I wanted to buy another IP with Bank C in both my name and my partners personal name, would the debt/income held under the trust with Bank B need to be disclosed on that loan application given that the trust would have an ABN and be considered business expense and therefore not on personal home loan application with Bank C?

Most lenders would demand you declare the contingent liability. If the further lending is regulated under NCCP, the broker and lender would also be well advised to make sure they can actually service the bottom line outcome to make sure the loan is "not unsuitable"

4. Lets say our current IP is with Bank A and we get our development project loan under a trust structure with Bank B, if I wanted to buy another IP with Bank C in another trust structure between myself and my partner, would the debt/income held under the trust with Bank B need to be disclosed on that loan application given that the trust would only consider my partners personal income and my personal income as the serviceability for that new trust application with Bank C?

as Above.Most lenders would demand you declare the contingent liability. If the further lending is regulated under NCCP, the broker and lender would also be well advised to make sure they can actually service the bottom line outcome to make sure the loan is "not unsuitable"

Lenders will generally strip the structures out and look at whats left over.....



Other side notes, with the trust purchase we have adequate cash holdings to have lending at 80% which I'm assuming will avoid the need for any LMI or any guarantees held for the trust debt.

Depending on the lender and the security etc, 80% wont require LMI, but will still require a directors ( ie servicing guarantee) and in some cases a beneficiary guarantee ( where the benes arent already captured in the directors guarantees

I'm primarily after just confirming what the serviceability issues are first and then this will bring up more specific questions with regards to appropriate structures etc. Please note, the purpose of this question is to see how to maximise my serviceability using trust structures not so much in regards to asset protection or anything like that.

Hopefully these questions make sense, any help would be much appreciated!

In closing, buying in a discretionary trust will HURT borrowing cap in most cases, since the debt such acquired isnt neg gearable

Be careful you dont end up in a web of structure because you are looking to achieve something specific that may be achieved in a simpler and clearer way

ta

rolf

 

[Terry_w]

I agree with Rolf

1. Not really. Generally the trustee?s income. If the trustee is a company the directors. Some banks may allow a beneficiaries income to be used even if they are not a trustee or director
2. Yes
3. Yes because you will have given guarantees for the trust loan so are each liable for the full debt if the loan is not paid. An ABN is merely a number and irrelevant whether there is one or not.
4. Yes, as above. But strictly speaking the bank should not count the income if it is a discretionary trust, but most seem to.
5. No, you will still need personal guarantees.

 

[Paul@PFI]

Hi guys,

We are now looking at buying a development site which will include myself, my partner and her brother all on the loan application/title. Plan is to purchase site with 3 unit development potential and split accordingly once completed. My partner and I would like to hold onto our two properties if possible, not fussed what her brother does. We are planning to do this under a trust structure of sorts (yet to specify exactly how as it is only early stages).

I didn't note if you were using a fixed trust or a discretionary trust. Either way you may have some issues with the matter you described that needs to be contemplated now.
- The development profit may be taxable across the beneficiaries and not capable of being attributed to brother.
- Depending on the trust, removing the brother may trigger substantial tax even on the properties retained. Its a complex concept and an example why multiple properties should not sometime be held in some trusts.
- The brother may retain a trust interest yet he has received his share of dev profits after tax ? Remember the properties you keep arent yours. They remain trust property. And if brother has a trust interest he also may have a entitlement. And if you remove him I suspect you will trigger massive tax issues for the brother well beyond his share of profit. (He could pay tax on your shares too)

All this and all the tax issues needs planning before implementation.

 

[golazo]

Thanks for the concise and in depth information guys, it is much appreciated. As mentioned, I expected that the responses would bring up a few more questions so here goes.

To Rolf (or anyone else who might be able to clarify), you mentioned that "Most lenders would demand you declare the contingent liability" By stating "most lenders", I'm assuming there might be some scenarios or lenders out there that wont demand that we declare the liability under the trust?

Just to confirm for my knowledge, how does a personal servicing guarantee work? Is this a guarantee secured against equity or just an piece of paper stating that we are liable to pay a certain debt?

The more I look into it it seems that the easiest way to increase serviceability is to increase income and reduce debt.... Who would have thought!!!

 

[Peter_Tersteeg]

To clarify what Rolf suggested. Lenders require you to declare any other loans you've guaranteed. This is taken into account when calculating your affordability. In essence, you might as well consider any loans you've secured via a trust to be loans that you're responsible for.

There are some exceptions to this, but in the context of trust lending, just assume you have to service the loans. You are signing a servicing guarantee so you have to make the repayments if the trust can't.

The other type of guarantee is an equity guarantee. The most common application of this is when parents use their home as security to help their kids get started. They're not saying they'll make repayments if the kids can't afford the loan, but they will give up some equity in their home (which in the worst case scenario might mean they have to borrow money and make payments to make good on that equity guarantee).