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If you’re borrowing money to purchase an investment property, you may be able to take advantage of the many benefits offered by a trust home loan. Borrowing through a trust offers tax advantages, asset protection and secure succession planning for the future, so it’s an option worth considering for many borrowers.
However, trust home loans can be quite complex, so you’ll need to compare a range of trust borrowing options to ensure that you get a loan that’s right for your needs.
A trust is an arrangement that makes it possible for a company or person to own assets on behalf of another person, a family or a group of people. The party that owns and controls the asset is called a trustee and is usually a trustee company or an individual, while the person or people for whom the property is owned are referred to as the beneficiaries of the trust.
As part of the arrangement, a ‘trust deed’ governs the role of the trustee, setting out any rules the trustee must follow and the details of how any profits will be distributed amongst the trust’s beneficiaries.
To take out a trust home loan to buy a residential property, you’ll need to set up a trust. This could be a family trust, a unit trust or even a self-managed super fund (SMSF) trust. Under such an arrangement, the property will be held by the company or person that acts as the trustee. The trustee takes up the home loan and guarantees its repayment, offering protection for the assets owned by the beneficiaries.
The homebuyers become the beneficiaries of the trust arrangement, and the trustee takes out the home loan on their behalf. As the homebuyers don’t legally own the property they are protected from any liability if loan repayments cannot be met, while there are substantial tax benefits to be had thanks to a 50% exemption from Capital Gains Tax (CGT).
However, obtaining finance for a home purchase through a trust company usually takes a lot longer than taking out a normal residential home loan as there are more parties and paperwork involved.
While there are many different trust types and structures available, not all of these will be accepted by lenders. In fact, there are some lenders who won’t offer any loans to trusts at all.
However, many Australian lenders will consider offering home loans to the following types of trusts:
A discretionary trust is the most common type of trust available. It is typically established to hold the assets and/or businesses of a family. This allows the family to enjoy a range of tax benefits and also protect their assets from any borrowing liability.
As long as the trust rules are followed at all times, the trustee can distribute income and assets from the trust to the beneficiaries however they like – in other words, distribution can be done at the trustee’s discretion. For example, the trustee might choose to distribute a large portion of the income from the trust to younger family members with lower taxable incomes, thereby resulting in tax benefits.
A family trust home loan is a flexible borrowing arrangement that can be tailored to suit your needs and will most likely give you access to loans from a wider range of lenders.
A unit trust is set up in a similar fashion to a company, where the property the trust owns is split up into a number of shares called units. The number of units each person holds then determines their voting power and their entitlement to income and capital gains from the trust.
If you want, units in a trust can be split into different categories, such as income units and capital units. Unit holders can also be individual people, companies or discretionary trusts.
Unit trusts generally do not offer as many tax benefits as family trusts, nor do they offer the same level of asset protection. They’re best set up for a group of people who are not family members.
A hybrid trust combines the features of a discretionary trust with those of a unit trust. Hybrid discretionary trusts are more common than hybrid unit trusts, and they’re set up to allow beneficiaries to take advantage of the best features of each type of trust. For example, the trust can be divided into units while income can also be distributed to beneficiaries at the trustee’s discretion. Hybrid trusts are also commonly referred to as property investor trusts.
Unfortunately, many lenders do not offer loans to hybrid trusts.
This type of trust can be set up to help people manage their superannuation. While it receives employer contributions like any regular super fund, the SMSF trustee, which is normally you, has control over how your super balance is invested.
Some Australian lenders now offer SMSF trust loans to borrowers who want to invest in residential property. These limited recourse loans attract higher interest rates than normal loans and typically have a maximum LVR of around 70%.
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