Buying Your Next Property In Your Trust or Company? Things You Now Need to Know

There has been a noticeable shift in how banks approach lending to companies and trusts. Many investors have used these structures for years to help with estate planning, asset protection or income distribution inside their family group.

Recently though, some borrowers have been sold very aggressive strategies on social media - promising ‘unlimited loans’ by cycling properties through trusts and companies to go around normal serviceability limits.

In response, several major lenders have significantly tightened or even paused new lending to these structures.

Macquarie announced that it would pause all new home loan applications where the borrower is a trust or company that effectively shuts that channel for new structured buyers.

The Commonwealth Bank has adjusted its policies so that lending to companies and trusts is now restricted and more heavily scrutinised including stronger checks on trust income and cash flow plus more conservative loan to value ratios.

ANZ recently confirmed that it will only lend to trusts or companies where the borrower is an existing customer and even then has capped loan to value ratios for this type of borrowing at around 70%.

Behind these moves is a general push to tighten risk assessment. Lenders are looking much more closely at whether the trust or company structure has a genuine commercial purpose and whether the underlying borrowers can clearly service the debt without relying on unrealistic rental or capital growth assumptions.

That means more documentation, slower approval times and in some cases a hard ‘no’ from a bank that would previously have said ‘yes’.

Why some lenders have stepped back – and others have stepped in

When the big banks change policy it tends to make headlines. However they are not the only source of funding for investors.

While some majors have restricted or paused loans to companies and trusts, there are still a range of non bank and specialist lenders that continue to lend to these structures on a case by case basis.

These lenders often price slightly higher than the sharpest big bank offers yet they can be more flexible around things such as trust income, multiple directors or beneficiaries and complex ownership structures.

The key is that every lender now wants a clear story.

They want to see:

• that the trust or company has been properly set up with professional advice,

• that the beneficiaries and directors understand their obligations, and

• that the investment itself stacks up under conservative assumptions.

If you approach a single lender directly without understanding their current policy settings, you may be advised they no longer support that type of lending - and can understandably feel like the end of the road.

In reality there may still be other lenders in the market willing to support the purchase if the structure and servicing are sound.

There is a genuine window of opportunity here. Many investors who set up trusts after watching a few online videos are being knocked back at the first hurdle that reduces competition for those who have taken advice, chosen suitable structures and can present a clear application to the right lender.

Putting it together

If you are thinking about buying in a company or trust it is more important than ever to be clear on why.

Asset protection, succession planning and genuine income splitting can all be valid reasons. However they work best when the structure is designed by an accountant or solicitor who understands both tax and lending impacts.

With some majors now only lending to existing customers and at reduced loan to value ratios, the choice of lender can materially change how much you can borrow and on what terms.

Having more than one option up your sleeve means your strategy is not derailed just because one bank has closed its doors to new trust lending.

Remember…

‘Outside the mainstream’ does not have to mean reckless.

A well priced loan from a regulated non bank lender with transparent terms can be a perfectly sensible part of an investment strategy as long as you understand the risks, rate and features.

In many cases the most valuable step you can take is simply to talk through your plans in detail before you sign a contract or set up a new entity.

That discussion often uncovers options – and pitfalls – that are not obvious from a quick online search.

We hope you found this interesting and educational. We look forward to chatting with you about your investment lending options.

If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email bob@westhomeloans.com.au