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Family Trust Home Loans

How you can secure a home loan through your family trust

Family Trust Home Loans

A family trust can be a great way to hold assets or run your family business, through which you can distribute funds to different family members. They’re not limited to just these, though, as you can use your family trust to purchase your very own home. In this guide, we go over how these loans work, why they might be right for you and more. Read on for more information.

How do family trust home loans work?

As you know, family trusts typically involve a company or person (trustee) owning and controlling assets on behalf of another person or group of people (beneficiary/beneficiaries). Family trust home loans, then, function in a way that you would probably expect: the trustee pursues a home loan on behalf of the trusts’ beneficiaries, who are the homebuyers, and acts as a guarantor for its repayment. Most lenders will ensure every beneficiary of the trust over the age of 18 is a guarantor to maximise security. All of this means that the property isn’t actually owned by the homebuyers. Rather, it’s in the name of the trustee company or individual who guaranteed the property.

Not all lenders will offer home loans to family trusts, however. This is due to the fact that the structure of trusts can, in some cases, muddy the waters when it comes to the liability for repaying home loans. If trust beneficiaries over the age of 18 refuse to accept guarantor status on the home loan, the application can fall flat. Also, because of the complicated nature of family trusts in relation to obtaining external financing, the process for being approved for a family trust loan is likely to take much longer than that of a standard home loan applicant.

Why should I borrow money with a family trust home loan?

There are a couple of major benefits when it comes to seeking out a family trust home loan: tax benefits and asset protection. Let’s take a look at why you should consider these when looking at a home loan through a family trust.

Tax benefits

The trustee of a family trust has the power to distribute the trust’s income between its beneficiaries, which can allow them to minimise the amount of total tax payable for the trust. For example, handing a greater proportion of funds to a lower income-earning beneficiary when compared to a high income-earning beneficiary can lower the overall marginal tax paid on the total. These tax discounts can prove to be a major factor in repaying your home loan, as they free up funds that can help you pay off your debt more quickly.

Asset protection

Not having your assets registered in your name may sound like a bad thing, but it can be a major benefit when you’re looking to borrow through a family trust. Because assets aren’t legally owned by family trust beneficiaries, they’re guarded from any liabilities a beneficiary may have. This means that if a beneficiary in your family trust is declared bankrupt, your home purchased through this trust cannot legally be sought after by a creditor. Your assets would also be protected in the event of your business failing or divorce between you and your partner.

How much can I borrow with a family trust home loan?

This amount will vary between lenders, as no two institutions are the same when it comes to lending criteria and requirements, but you’ll be able to find lenders who offer up to 95% loan-to-value ratio (LVR) on investment loans. Low documentation (low doc) home loans are also offered to family trusts but are generally harder to come by. LVR requirements tend to be stricter in low doc home loans, with a deposit of up to 40% necessary with some lenders. However, you might be able to find lenders who will grant you funds worth up to 80% of your property’s value.

What documents you’ll need for a family trust home loan?

Here’s the list of documents you’re going to need when applying for a family trust home loan.

Family trusts with a sole trustee (normal person)

  • Personal tax returns from the past two financial years (or one)
  • Notice of assessment from the previous financial year (or two)
  • Identity documentation from all of the trust’s beneficiaries, as well as the trustee
  • Certified copy of the family trust’s stamped Trust deed.
 

Family trusts with a corporate trustee (company)

  • Tax returns from both the trust and director’s personal finances from the previous two financial years (or one)
  • Profit and loss statements from the previous two financial years (or one)
  • Balance sheets from the previous two financial years (or one)
  • Certified copy of the company constitution
  • Identity documentation from all of the trust’s beneficiaries, as well as the trustee
  • Certified copy of the family trust’s stamped Trust deed.

The pros and cons of family trust home loans

Still unsure about seeking out a family trust home loan? Check out some of the pros and cons below to help you decide whether it’s right for you.

PROS

Protecting your assets

Any home purchased through a family trust is protected from the liabilities of other beneficiaries, preventing it from being acquired by a creditor.

Saving money on tax

Beneficiaries of family trusts can be eligible for a 50% capital gains tax discount, which can save a substantial amount to help with home loan repayments.

CONS

Guaranteeing your home loan

For your application to succeed, you’ll probably have to get every beneficiary in your trust to agree to act as guarantor for your home loan, which may make it more difficult.

Complicating the process

Because of the extra paperwork required for beneficiaries, family trust home loans can take much longer to process than a standard home loan.

Frequently asked family trust home loan questions

Still have some burning questions about family trust home loans? Here are some of the most common queries that others have.

Can I be approved for a home loan through my family trust if I have bad credit?

Potentially, yes – because your home loan will be guaranteed by at least one or more different guarantors, your chances of approval are increased even if your financial history is imperfect. Unlike other home loans, though, having beneficiaries go guarantor on your home loan won’t enable you to receive 100% of your property’s value.

Can tax losses be distributed amongst beneficiaries in a family trust to help with a home loan application?

No – even though income and tax benefits can be distributed between beneficiaries, tax losses cannot be divided amongst your family.

What’s the difference between a family trust and discretionary trust?

A family trust is a type of discretionary trust that is specifically tailored to deal with the management of assets or funds between family members or run a family business.

Who can be considered a beneficiary of a family trust?

Beneficiaries can include (in relation to the trustee) grandparents, parents, siblings, children and nieces and nephews. This extends to any and all spouses of these family members. In the case of the trustee, the equivalent familial relations of their spouse (e.g., their spouse’s parents and children) can also be considered beneficiaries of a family trust.

Are there extra fees that I’ll have to pay if I’m applying for a home loan through a family trust?

Yes – because of the greater volume of paperwork, lenders will generally add fees to cover their services for family trust home loans. You may find that you’re charged additional legal fees in this process, which can cost up to $500 with some lenders. Where possible, you should try to look for lenders who charge closer to $200 for these fees.

Can I sell a current investment property to my own family trust?

Yes – you may wish to do this if you’re selling to a family member who’s a member of the trust. However, you’ll be liable to pay capital gains tax on the property sale, while the trust will have to pay stamp duty.

Will I be able to smoothly pass my property down to my kids when they’re older after I pay off my family trust home loan?

Yes – another advantage of a family trust home loan is that it can make the transition of assets from one generation to another simpler and less expensive when it comes to paying tax. Buying a home under this umbrella can be an effective way of maintaining the asset to eventually pass down to your kids or other future generations.