Trust lending shake-up: What’s next for investors?

According to Loisance, more Australians have been starting their property journey through trust lending, whereas a few years ago, only investors with three or more properties were taking that route.

“There’s been a lot of advice and social media trends that have shaped what happened over the last two years. Obviously, banks are speaking about it and starting to push back a little,” she said.

Tarrant said that one industry concern has been the use of multiple trusts to acquire properties simultaneously, which can lead to overextension if investors are unable to service multiple loans.

“You just apply, you get three approvals, four approvals simultaneously – before it's hitting credit reports and all this sort of stuff, so you can buy four,” he said.

“Every lender will assess you, assuming there's only one person, not knowing that you're doing the same process with other people.”

Loisance said that investors may avoid lenders’ suspicions by simply telling them that they haven’t pursued the other applications.

“You just have to remember that at the end, you're the one who has to pay four mortgages when you technically could only afford one. You're the guarantor. You give full personal guarantee to those trusts.

Tarrant and Loisance spoke about the impact of Westpac’s changes, which prevent trust-based lending through retail and broker channels and now require investors to go through private banking divisions.

“Essentially, what they want to do is control this idea that it's a proprietary channel thing. You have probably typically higher wealth people investing via trust, so they've probably already got a business banking relationship with them,” Tarrant said.

He added that the decision signalled that banks wanted to move away from mortgage brokers and towards direct relationships, despite most Australian consumers wanting to use brokers.

Tarrant and Loisance also discussed the Commonwealth Bank’s trust lending changes, which now require the applicant or their servicing guarantor to have held an established lending facility with the bank for at least six months.

“What changed there is they want people to know if they do want to buy through a trust, you already have to be an existing lending client of theirs,” Loisance said.

“It's somebody that would have had investment properties, or at least a home with them for quite some time, so they can have more checks on clients.”

Loisance noted that the Commonwealth Bank’s move was a clever way to mitigate the risk and ensure its clients do not have other trusts in other banks.

Tarrant said that, with Big Four banks becoming more rigid in their operations, investors could use non-bank lenders if they wanted to buy through trusts.

“What will emerge is a cohort of lenders who would be specialising in trust-based lending. They're not going to be major banks and potentially not also ADIs (authorised deposit-taking institutions).”

“There’s probably going to be a little bit more room for manoeuvre inside policies as a result of that. So this might be okay for property investors for those who still want to invest in the trust.”

According to Tarrant and Loisance, investors should work with mortgage brokers and financial advisors to determine the best course of action amid the banks’ changes.

Tarrant said that investors should carefully choose their advisor to ensure they receive the best advice for their investments and avoid unnecessary risk.

“You might, you might be getting paid advice from someone, but you take on four mortgages or three mortgages when you can only afford one based on serviceability requirements.”

“The reality is that if you can't cover that and something happens, it's a house of cards that can come tumbling down,” he concluded.

Listen to the full episode here

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