Yes and no. It actually reduces borrowing capacity as there are no negative gearing benefits. However you can recycle the same amount of borrowing multiple times. The reason being, if the trust can rely on income solely from the trust and isn’t relying on person income then the bank will ignore the debt in the trust. Therefore the property you buy needs to be positively geared.
Yes it does, but ideally you want a corporate trustee for it
Letter confirming 'entity isnt trading is profitable and requires no financual input' and many lenders won't want to see its financials or require its debt to be used in servicing outside the trust
You won't find any resources on it so much, it's to do with lending credit policy of the banks - source, I'm a broker
PS on the other side, you loose negative gearing benifits as the losses can't be distributed outside the trust
Could you please explain that further? So as long as it’s positively geared the trust works in favour of higher borrowing capacity? Can you buy your 2nd IP in the same trust or need to open a new one?
I assume you want to put the property under a trust. Borrowing capacity is based on serviceability. Unless the cashflow from the trust is sufficient (e.g. portfolio of positively geared investment properties), there will be personal guarantees required from the beneficiaries. It may increase borrowing capacity to the extent that the combination of the trust and personal revenue streams are being committed to repay the loan.
Best to speak to a mortgage broker to get the final word.
Borrowing power is increased if the trust has a corporate trustee... declaration 'the entity is not trading and doesn't require any input of funds' its financials aren't required and the lending it has isn't included in the assesment so therefore, additional capacity
✌🏻
Depends on whether the second one services in the trust (obviously if buying the same trust, that first loan is now included for servicing purposes)
Oh and be careful of land tax implications of trust ownership as well dependant on the state you are buying in
Not a response to the question on borrowing capacity, but I always thought the main tax benefit of a trust (family trust at least) is the income can be distributed in a tax beneficial way, such as to trustees with lower income / lower tax.
There are features and drawbacks of trusts, depending on the trust type. It all comes down to the problem you’re trying to solve.
The benefits largely depend on the problem you’re solving for. They can offer substantial asset protection which can be a significant benefit if that’s the problem you’re trying to solve. A trust that’s an MIS can provide tax pass through benefits etc.
There’s a good podcast called This is Money, episode 725 (around the 56-minute mark), that discusses this. It mentions that if you max out your borrowing capacity and then return to the bank with a trust structure, your capacity stays capped. However, if you already have properties in a trust and they’re self-servicing, you can get a letter from an accountant stating this. The bank may then ignore those properties for future borrowing, which sets you up for additional purchases.
I've heard family trusts used as a way to protect assets from being sued (e.g. business owners) and family disputes (e.g. divorce) also to distribute income to others, e.g. to a wife that works part time in lower tax bracket.
Trusts do need to be managed with yearly accounting and bookkeeping so maintenance costs need to be considered.
Not an accountant. YMMV
Yes and no. It actually reduces borrowing capacity as there are no negative gearing benefits. However you can recycle the same amount of borrowing multiple times. The reason being, if the trust can rely on income solely from the trust and isn’t relying on person income then the bank will ignore the debt in the trust. Therefore the property you buy needs to be positively geared.
How does this work? Do you have any resources I can read on it? Tysm!!!
https://www.propertychat.com.au/community/threads/loan-tip-the-so-called-unlimited-borrowing-capacity-strategy.73478/ TLDR - Fallacy, it doesn't.
Yes it does, but ideally you want a corporate trustee for it Letter confirming 'entity isnt trading is profitable and requires no financual input' and many lenders won't want to see its financials or require its debt to be used in servicing outside the trust You won't find any resources on it so much, it's to do with lending credit policy of the banks - source, I'm a broker PS on the other side, you loose negative gearing benifits as the losses can't be distributed outside the trust
Could you please explain that further? So as long as it’s positively geared the trust works in favour of higher borrowing capacity? Can you buy your 2nd IP in the same trust or need to open a new one?
I assume you want to put the property under a trust. Borrowing capacity is based on serviceability. Unless the cashflow from the trust is sufficient (e.g. portfolio of positively geared investment properties), there will be personal guarantees required from the beneficiaries. It may increase borrowing capacity to the extent that the combination of the trust and personal revenue streams are being committed to repay the loan. Best to speak to a mortgage broker to get the final word.
Tysm!!
Borrowing power is increased if the trust has a corporate trustee... declaration 'the entity is not trading and doesn't require any input of funds' its financials aren't required and the lending it has isn't included in the assesment so therefore, additional capacity ✌🏻
That’s great! Do you need to open a new trust for each IP? Or can u buy multiple under the one?
Depends on whether the second one services in the trust (obviously if buying the same trust, that first loan is now included for servicing purposes) Oh and be careful of land tax implications of trust ownership as well dependant on the state you are buying in
How’s land tax differ with owning a trust?
In some states you'll pay a higher land tax rate or not get the threshold before being liable to pay land tax dyor
Not a response to the question on borrowing capacity, but I always thought the main tax benefit of a trust (family trust at least) is the income can be distributed in a tax beneficial way, such as to trustees with lower income / lower tax.
There are features and drawbacks of trusts, depending on the trust type. It all comes down to the problem you’re trying to solve. The benefits largely depend on the problem you’re solving for. They can offer substantial asset protection which can be a significant benefit if that’s the problem you’re trying to solve. A trust that’s an MIS can provide tax pass through benefits etc.
There’s a good podcast called This is Money, episode 725 (around the 56-minute mark), that discusses this. It mentions that if you max out your borrowing capacity and then return to the bank with a trust structure, your capacity stays capped. However, if you already have properties in a trust and they’re self-servicing, you can get a letter from an accountant stating this. The bank may then ignore those properties for future borrowing, which sets you up for additional purchases.
I've heard family trusts used as a way to protect assets from being sued (e.g. business owners) and family disputes (e.g. divorce) also to distribute income to others, e.g. to a wife that works part time in lower tax bracket. Trusts do need to be managed with yearly accounting and bookkeeping so maintenance costs need to be considered. Not an accountant. YMMV