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.
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.
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.
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.
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.
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.
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)
Family trusts with a corporate trustee (company)
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.
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.