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Most everyone is familiar with the process of applying for home loans as an individual or couple. However, many people don’t know that it is also possible for a trust to obtain a residential loan. Loans to trusts are a bit more complicated in nature, but if you have the right type of trust and can locate an appropriate lender, the loan you need can be secured. 

What is a Trust?

A trust is a legal agreement in which the assets of a person, group of people, or family are owned on their behalf by another person or company. The person or entity that owns and controls the assets is known as the trustee, and the person, group of people, or family allowing the trustee to control said assets are referred to as beneficiaries of the trust. The arrangement is controlled by a trust deed, which is a document stating various rules that must be followed by the trustee, as well as how the profits of the assets are to be distributed among beneficiaries. Most trusts are created to either maximize tax benefits or protect the assets in question. 

Why Are Trusts Created?

The majority of trusts are created to protect a given asset. Since the assets included in the trust are not the legal property of the beneficiaries of the trust, so the assets are therefore safe from the liabilities of the beneficiaries. For example, if the beneficiary of the trust files bankruptcy, the assets in the trust will not be included in the bankruptcy process. In the case where a loan is taken out by the trust, the lender will of course secure a guarantee of repayment. However, no other creditors will be able to touch the assets protected by the trust. 

A trust may also be developed in order to attain certain tax benefits. The government offers the beneficiaries of a trust a 50 percent exemption on capital gains tax. However, this tax benefit does not extend to a company’s shareholders, thus making a trust arrangement more profitable. Trusts can also be used to pass assets from parent to child without incurring taxes. Property can usually only be transferred to one’s children without incurring tax in the event of one’s death, but a trust allows this tax-free exchange to take place while the parent is still alive. Finally, a trust can be used to divide investment income between spouses under a lower tax rate. This process is known as income-splitting. Income-splitting was once also used to divide income among other family members as well, but this is no longer possible. 

Securing a Loan Through a Trust

If you are looking to secure a loan through your trust, you must be careful in choosing the type of trust you will arrange. Some types of trusts are not appealing to lenders. In addition, not many loan brokers are well-educated in the area of trust lending. As a result, many bank employees and residential lenders will not want to lend to a trust and will instead direct you to the commercial lending division. Borrowing from the commercial lending division means more fees and higher interest rates, so it is better to secure a residential mortgage loan if you can. 

The best type of trust to arrange if you hope to secure a loan is a family trust. This type of trust is typically created to protect a family’s assets and provide tax benefits to family members. A family trust is considered a discretionary trust, meaning that the trustee use his or her best judgement to distribute the income and assets included in the trust as long as the rules of the trust deed are not violated. Having this type of trust will offer you the most options for securing a loan through the trust.

It is also possible to borrow through a unit trust, though residential loans to unit trusts are only available from select lenders. A unit trust is a type of trust in which the assets included are divided into shares, or units. Individual beneficiaries will own different numbers of units that represent their entitlement to voting power, income, and capital gains. Units can be held by companies, individuals, or even by other trusts. In addition, a unit can be categorized based on what type of asset it represents. This type of trust is most common when beneficiaries are not all family members. 

Unit trusts do not provide the same degree of tax benefits as a discretionary trust, with the exception of cases in which units are owned by a discretionary trust. In addition, unit trusts aren’t as good at protecting assets either. If for some reason a beneficiary of a unit trust becomes bankrupt, his or her units will be included in the proceedings and will most likely be sold to pay off debt. 

A third type of trust to which loans can be extended is a self-managed super fund trust or SMSF. An SMSF trust is typically created for people that wish to be in charge of their own super fund. In this type of trust, the typical amount of money from a person’s employer will be added to the fund as well as anything he or she wishes to add. Typically, the person in question will act as trustee and retain direct control over the fund. 

Residential loans to a self-managed super fund trust are rare and difficult to secure, but they are possible to obtain. Most lenders require a loan-to-value ratio of no more than 70%, however a select few will allow up to 80% for a SMSF mortgage. Typically, such loans are extended so that the SMSF can invest in residential property. In order for this to work, the property in question must usually be purchased by a limited liability company and held in a trust for the SMSF trust. Once the loan on the property is repaid, the SMSF will have the right to acquire the property. 

The final type of trust we will discuss is the hybrid trust, which combines the features of both a unit trust and discretionary trust. However, it is nearly impossible to secure a loan through this type of arrangement. There are very few lenders that will consider extending a residential loan to a hybrid trust.

Trusts can be very beneficial in many ways. They are used to attain tax benefits as well as to protect important assets from the liabilities of the beneficiaries. In addition, it is sometimes possible to secure a loan through a trust. However, it is important to be careful of the type of trust you create if you intend to use it to obtain a loan. There are several types of trusts that can receive loans including family trusts, unit trusts, and self-managed super fund trusts. The best type of trust for securing a low interest residential loan is the family trust as it is the one with which lenders are typically most comfortable. Finally, it is sometimes possible to obtain a loan through a hybrid trust, though this is a rare occurrence.

Learn more about loans to trusts.