Can non-banks save investors in ‘trust prison’?

How many people own property in trust?

According to the Property Investment Professionals of Australia (PIPA)’s Annual Investor Sentiment Survey from 2023, about 16 per cent of survey respondents indicated they owned property in a trust.

PIPA chair Nicola McDougall noted that the vast majority of investors own property either as joint tenants, perhaps with their spouse, or individually in their personal names, according to the survey (on nearly 63 per cent and 50 per cent, respectively).

Nearly 10 per cent of survey respondents indicated they owned property as tenants in common.

Speaking to The Adviser’s sister brand, Smart Property Investment (SPI), Finni Mortgages chief executive Paul Glossop and broker Eva Loisance discussed the issue with sophisticated investor Phillip Tarrant, who shared a personal anecdote about his attempt to negotiate a better rate with a major bank for his investment properties held within a trust.

Mr Tarrant outlined that the bank’s retention team flatly refused to consider repricing, citing a policy against adjusting rates for investment properties held in trusts. This policy could potentially trap property investors in a “trust prison”, he warned, as they would be unable to benefit from future rate reductions.

The issue builds on recent warnings issued by brokers to The Adviser relating to other lenders when it came to lending to properties in trust.

Several brokers have now been proactively reaching out to property investor clients to check in with them and see if they are able to find a better deal – particularly as some lenders are waiving break costs for those refinancing away if they’re unable to help due to a product no longer being available.

Indeed, Mr Tarrant suggested that, as the landscape evolves, non-bank lenders and white-label products may find a wave of new investor clients coming to them for competitive alternatives, spurring innovation in the mortgage industry.

Which lenders are still offering loans to property in trust?

The wave has already started gaining momentum.

Peter Vala, the general manager of partnerships and distribution at Thinktank, told The Adviser that the lender had “observed a notable trend upwards in trust transactions, predominantly featuring discretionary trusts and unit trusts, with occasional instances of testamentary trusts”.

“Out of these, the most noteworthy increase has been in unit trust structures,” he said, adding that there remained a consistenly high volume of loans where a self-managed superannuation fund (SMSF) serves as a beneficiary of the trust, too.

“Trust structures inherently involve greater elements of complexity compared to conventional loans to individual borrowers, companies, or special purpose vehicles (SPVs),” he continued.

As such, he recommended that any brokers looking to help clients refinance these loans ensure they comprehend the income source, establish the flow of funds for distribution, carefully consider any guarantees, and understand the most appropriate security structure.

Mr Vala said that while fundamental credit assessment principles remain constant when lending to trusts, lenders that hold trust lending expertise – such as Thinktank – are able to offer brokers a range of support “from workshop all the way to settlement”.

Similarly, La Trobe Financial’s chief lending officer, Cory Bannister, stated that it had been “experiencing steady demand from sophisticated investors seeking flexibility in loan structuring”.

“Non-bank lenders like La Trobe Financial are ideally positioned to assist, given their granular, tailored credit assessment model, that can provide a differentiated outcome to that of the major banks who are often locked into using fixed ratios and prescribed loan structures,” he said.

“Brokers tell us that clients are very happy to prioritise flexibility in their decision-making criteria for selecting a lender,” he continued, adding that “complex credit” sat at the core of the non-bank’s value proposition, including lending to discretionary (family) trusts, unit trusts, bare trusts and superannuation trusts.

While Caesar Ibrahim, Liberty Financial’s group manager – residential, told The Adviser that it hadn’t seen “a significant change” in the mix of loan structures recently, the non-bank knew that trusts were “often the preferred vehicle for investors” and continues to support trust applicants across its lending solutions.

“At Liberty, our strength is the ability to assess a deal on its merits, whatever the holding structure. While traditional lenders may shy away from complexity, including trust structures, at Liberty, this [is] where our expertise and capability really shine.

“Taking the time to understand the full story behind the application has been part of our value proposition from day one. That’s one of the reasons we continue to offer SMSF lending solutions across both residential and commercial properties – even as we see other lenders pull back,” he said.

“Whether a trust loan or an SMSF loan, Liberty takes a closer look to help more brokers find unique, tailored solutions to meet a range of customer objectives.”

You can find out more about the investor trust issue in the Smart Property Investment Show, here.

[Related: Lenders refusing to reprice some borrowers, brokers warn]