Hi all
I am after some advice on restructuring our loans to smoothen things out as we look to expand our IP portfolio, and would like to tap on the wisdom of this forum :)
We currently have 1 IP – this is a 2BR Apartment being rented at 390/week. Purchased at 500k now with 300k left on the mortgage (estimated value now around 600k). This was purchased as a joint property between myself and my wife, and is being paid off as a P&I.
We are setting up a family trust (comprising of my wife and myself, with our 2 kids) with the aim of asset protection as well as to optimise our tax structure.
I have a stable job in the healthcare industry and am AHPRA registered – as such I am entitled to take out a 90% LVR loan with no LMI. We currently also have approximately 100k in savings that is in an offset account with our first IP.
Moving forward we are hoping to take out an loan to release equity on our current IP, and use that as a deposit to purchase another IP in the name of our family trust. However I have some questions re: this –
1. When taking out the loan against our first IP (which is in my name), must this loan be in my name, or can the Family Trust take out the loan and let me authorise the use the equity of our IP as a guarantee?
2. Although my profession allows me to loan up to 90% LVR without LMI, does this apply when the family trust takes out the loan with myself as the guarantor?
3. How does the bank decide how much can be loaned to the Family Trust, since the trust does not provide any income? Would it be based on my serviceability (acting as the guarantor)?
4. When refinancing the mortgage on the 1st IP, would it also be possible to convert it to an interest only loan at the same time? That way I can enhance my tax claims against my income (since it would make the property negatively geared whilst still being held in my name).
Thanks all!
Regards
SingHi Sing
Couple of quick answers to your questions raised.
When taking out the loan against our first IP (which is in my name), must this loan be in my name, or can the Family Trust take out the loan and let me authorise the use the equity of our IP as a guarantee?
The loan would in the name of the Trustee for the Family Trust with you as Guarantor.
Although my profession allows me to loan up to 90% LVR without LMI, does this apply when the family trust takes out the loan with myself as the guarantor?
Depends on the lender but YES with the ones i have done.
How does the bank decide how much can be loaned to the Family Trust, since the trust does not provide any income? Would it be based on my serviceability (acting as the guarantor)?
Yes your personal income would be taken into consideration together with your personal expenses and any rental income / loans etc the Trust currently has.
When refinancing the mortgage on the 1st IP, would it also be possible to convert it to an interest only loan at the same time? That way I can enhance my tax claims against my income (since it would make the property negatively geared whilst still being held in my name).
Will depend on who the lender is.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks richard!
Regarding this:
How does the bank decide how much can be loaned to the Family Trust, since the trust does not provide any income? Would it be based on my serviceability (acting as the guarantor)?
Yes your personal income would be taken into consideration together with your personal expenses and any rental income / loans etc the Trust currently has.
I have read that taking a loan out in the name of a family trust maximises serviceability, as I don’ take on additional debt in my own name.
However, does this still apply if I act as both the trustee and the guarantor?
REgards
SingHi Sing
I have read that taking a loan out in the name of a family trust maximises serviceability, as I don’ take on additional debt in my own name.
Regretfully this is incorrect. Guarantees are taken into consideration when calculating servicing.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Sing,
Do you also have a PPOR? Does it have a loan against it? If so, that’s the loan that needs to have the offset 😉
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
Hi all
Thanks for the info. Due to the nature of my work (have to move alot) we’re not looking to get a PPOR.
At this point would buying a property with a family trust make any difference or cause issues with serviceability?
Understand that the main benefits right now are asset protection and tax structuring (for positive geared assets).
Thanks
SingNo PPOR and no other non-deductible debt = yeah, offset should be against the highest interest rate loan 👍
Yeah, trust makes servicing a bit more complex and a bit less of a lenders panel but your broker should be able to safely guide you through it, no worries 😎
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
Thanks for that!
I’m trying to understand Steve Mcknight’s comment in his book, that using a trust allows him to “leverage his income to increase his borrowing ability”.
If the serviceability of a family trust is dependent upon the debt and income of the guarantor, how does this differ from taking out the loan in my own name? At the end of the day the total debt is the same, and there is only a certain amount of income, whether it flows from me or from me to my trust?
Thanks for any clarification!
Hi Singchee,
I’m trying to understand Steve Mcknight’s comment in his book, that using a trust allows him to “leverage his income to increase his borrowing ability”.
Your question intrigued me, so I thought I would go looking…. You didn’t say just which of Steve’s books you were quoting, but there is a whole new chapter in the re-released “From 0 to 130 properties” book. It was re-released in 2009, so if you have an earlier version, this information WON’T be in it – at least not in this form.
The answer to your question appears to be VERY well covered in Chapter 9. The short answer appears early in that chapter in a table where Steve compares “Buying as an Individual” with other forms of borrowing (like “Buying in a Family Trust”). His comment re Trust purchases says this:-
Borrowing capacity – Debt is in the name of the company as trustee and the directors act as guarantors. Allows directors’ incomes to be used multiple times.Further on in the chapter is a section titled “The Structure Steve Uses” where it goes into a quite complete breakdown of his method. On p172 a sub-section titled “Borrowing Capacity” includes a highly detailed explanation. Note that he advocates things that others might gloss over.
e.g. Steve suggests don’t borrow more than 80%, and use P&I not IO. He also outlines the REASONS for doing these. It is interesting to read this from a self-made multi-millionaire, as what he advocates is not what many others suggest. As he says, “Success comes from doing things differently”…..Well worth a read (or a re-read) to get the good oil from a top bloke !! ;)
Benny
Thanks benny!
Yes I have the newest edition of the book, although I was mainly quoting from 0 to 260 properties.
I’ve gone to reread chapter 9 and it makes more sense – debt held by the trust is not recorded against the guarantors financial record, hence he can ‘recycle’ his income by setting up new trust structures.
One issue outstanding is whether acting as the direct trustee of a trust differs from using a company trustee – if I act as the direct trustee would loans taken out by the trust be reflected on my record?
Thanks!
SingHi Sing,
…debt held by the trust is not recorded against the guarantors financial record…
Hmm – I read quite the opposite to that !! Let me quote from the book:-
p 175 – Is this legal?
Yes — it’s legal and ethical, but if you have any doubts then let me point out:
1. You are not lying or hiding the truth. If asked, you must declare all the loans you are guarantor for.2. Your credit record will clearly note what loans you have applied for, and what loans you are guarantor for. Even if the application form doesn’t request it, your financier will soon find out.
What he also did say though, was this (on page 174) :-
When asked by subsequent financiers, so long as the loan is not in default, the debt to ABC Bank will not count towards your borrowing limit, and so you can keep leveraging off your income time and time again.One issue outstanding is whether acting as the direct trustee of a trust differs from using a company trustee
Steve seems to think so – re-read his comment on Asset Protection (p169 and into p170). In there, though he acknowledges that an individual CAN be the trustee for the Trust, he uses a Company as Trustee and goes on to explain why.
The difference is HUGE !! Read it all again, Sing – and maybe lay it in front of your Accountant or whomever to get their input too.
Benny
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