Strategy

Trust-Based Lending: Why Most Brokers Hand the File Back

Trust-based lending is one of the segments of Australian finance where the lender panel narrows materially. Around half of the residential lender panel decline trust applications outright. Two of the major banks generally avoid trust lending altogether. The brokers who can navigate the smaller panel of trust-friendly lenders, the documentation requirements, and the personal guarantee position consistently are a smaller cohort again. The result is that trust files often pass through several brokers before finding one willing to write them.

8 May 20269 min read

Why trust files are different

From a lender's perspective, a trust borrower is a more complex risk than an individual or company borrower. The trust deed governs how the trust operates, who can borrow on its behalf, who is entitled to income and capital, and what happens on appointment or removal of beneficiaries. Each trust deed is its own document; lenders cannot rely on a standard template.

The lender's solicitor is required to review the deed for borrowing power (express authority for the trustee to borrow), acceptable beneficiary class, and provisions that don't conflict with the lender's security. A deed that fails any of these checks may need amendment or replacement before the loan can settle.

Even where the deed passes review, the lender typically requires personal guarantees from beneficiaries or trustees. The guarantee shifts the credit risk back to identifiable individuals; the trust structure is preserved for tax and asset-protection purposes but does not insulate guarantors from personal liability on the loan.

Discretionary trust (family trust)

A discretionary trust, often called a family trust, is the most common trust structure used to hold residential investment property in Australia. The trustee has discretion over how income and capital are distributed among a defined class of beneficiaries.

Lender treatment of discretionary trusts:

Around half the residential lender panel decline outright. Two of the major banks generally avoid discretionary trust lending.
Several mid-tier banks, non-bank lenders and specialist lenders accept the structure. Pricing and policy vary materially.
Personal guarantees from 2 to 4 adult beneficiaries are typically required. The guarantors are assessed on personal income and credit position.
Servicing assessment uses the trust's net income (rent less expenses) plus the guarantors' personal incomes. Discounts to rental income may be applied more heavily than for personal-name borrowing.
Rate premium relative to standard personal-name investment lending is common but bounded; trust pricing is usually not punitively higher when the lender does write trust loans.

Half the lender panel doesn't want the file. The half that does has stricter rules. The work is matching the file to the right lender first.

Unit trust

A unit trust issues units to its members, who hold defined entitlements to income and capital in proportion to unit holdings. Unit trusts are sometimes used for joint property investments where the parties want defined entitlements rather than discretionary distribution.

Unit trust borrowing is generally harder to fund than discretionary trust borrowing. The lender panel is narrower again. Some lenders that accept discretionary trust files decline unit trust files; others apply additional documentation requirements around unit holder consent and joint guarantees.

Hybrid trust

A hybrid trust combines features of unit and discretionary trusts. Hybrid structures were once popular for property investment because they appeared to offer both negative-gearing benefits and discretionary distribution. ATO position on hybrid trusts has been more conservative in recent years; their tax treatment can be challenged.

Lender appetite for hybrid trust borrowing is the narrowest of the trust structures. A handful of lenders accept hybrid trust files; many specifically exclude them. Borrowers using hybrid trust structures should obtain current advice on both the tax position and the lending position before relying on the structure for property finance.

Guarantor and personal liability position

Personal guarantees are an inevitable feature of trust-based lending in Australia. The guarantor takes on personal liability for the loan, separate from the trust's liability. In a default scenario, the lender can pursue the guarantor's personal assets to recover the loan balance after enforcement against the trust property.

Most Australian lenders require 2 to 4 adult beneficiaries to guarantee an investment loan through a trust. The guarantors must individually pass credit checks and serviceability assessment. A guarantor with weak personal credit or thin serviceability can compromise the entire application even where the trust's own position is strong.

The asset-protection benefit of the trust structure is preserved against general personal creditors of the guarantor; it is not preserved against the lender holding the security. This is the most commonly misunderstood feature of trust-based lending.

How Maxfin handles trust files

The first conversation is with the borrower's accountant or lawyer to confirm the trust deed permits borrowing in the proposed structure, and that beneficiaries who will act as guarantors are properly identified.

Lender selection is then matched specifically to the trust type, the borrower's overall position (income, existing debt, credit profile), and the asset class being acquired. The set of lenders that will write a discretionary trust loan secured by a residential investment property in a major metropolitan area is different to the set willing to write a unit trust loan against a regional commercial property.

Maxfin coordinates the deed review with the lender's solicitor early in the process. Where the deed needs amendment to satisfy the lender, the borrower can engage their own solicitor to make the change rather than discovering the issue at settlement.

Submissions are sequenced to a single lender that fits the file's full profile rather than scattered across the panel. Trust files generate avoidable enquiries quickly when handled badly.

General information only. Not credit advice and not tax advice. Lending outcomes depend on individual circumstances and are subject to lender credit criteria, terms and conditions. Where tax considerations are described, they are general in nature; advice on a specific tax position should be obtained from a registered tax agent or accountant. Maxfin holds Australian Credit Licence 384406 and is not a registered tax agent.