If you own a Hybrid Discretionary Trust, you’d be fully aware of the attention the ATO has been giving them in recent years. Well now it’s the lenders turn too, and they have lost their appetite for them to the point there are now only three banks that will accept a property held in a Hybrid Trust as security. If you do not meet these three lenders servicing criteria then you may have to sell. Simple things like recasting your interest only period back out to ten years before it goes to Principal and Interest, or increasing the loan, in either a top up or equity release will most likely result in a no from credit unless you’re using one of the last three funders.
The days of the HDT could be over…
Back when I started Trilogy in 2004, the Hybrid trust was relatively new on the lenders scene. We had to explain to them how they worked; they would in turn run it past their legal departments and then come back with an approval. We’d then use that approval as precedence for subsequent applications. Back then we had a plethora of lenders that had an appetite for them, then as the word got out; promoters (usually partnered with accountancy firms that had a vested interest in selling you a trust deed) started selling trusts at seminars like they were a commoditable item.
Then along came the Global Financial Crisis in October 2008 and the ATO simultaneously started to get interested in these ’schemes’.
The people that were negatively gearing their owner occupied homes had to stop, the folk that were claiming gearing costs against the highest income earner and capital gains against the other also had to stop, the sexiness of the HDT was over.
Since then everything has been somewhat dormant with the Hybrid Deed, a little noise here and there, but basically not much has been said until recently, when the remaining funders that survived the GFC started reviewing what identities they’ll accept as borrowers and Guarantors.
Well here’s where the news gets bad for the property investor…
The remaining residential lenders that were accepting the HDT have recently lost their appetite for them and are finding it much easier to lend to structures that are not under regular scrutiny. It is now to the point we only have three residential lenders left that will fund through the HDT structure, [That is lenders that will openly do them, and say so in policy].
So what does this mean to you the owner of a HDT?
Well it means if you have a Hybrid Trust and want to use the residential security in it for borrowing against you’ll have to meet the lending criteria of one of these lenders. If you’re already at capacity with all three of them, then you’re not going to get any more money unless you sell.
You may be thinking well what about if my property is with a lender that use to do the HDT structure, can I top up the loan with them? Some lenders yes and some lenders no.
This is serious stuff, if you have property in a HDT, it’s quite conceivable that in a few years time you may not be able to access residential funding at all. [I stress residential as commercial hasn’t been affected].
From a borrowing point of view, my advice is to not set up a Hybrid structure and put residential property into it. You could be trapping yourself in the future, unable to refinance, top up or release equity with your only option being to sell.
Now if you think this is scare mongering, cast your mind back to post October 2008 when we saw this all unfold for the first time with the GFC and when bank policy changed and put borrowers in the position of what we call equity lockup.
You’d recall we saw the end of the Self Certified loan and the Asset loan, aka Low doc and No doc. There were a whole host of borrowers who’d retired from paid employment and built a property portfolio using these instruments. Then came the GFC, no more Low docs… The only way they could access equity to live on was to either return to paid employment or sell the properties. Today I still see old Low doc borrowers selling properties to access the equity built up over time because they can’t generate enough PAYG income to satisfy a banks servicing model.
So don’t think it won’t happen…
Will the hybrid Discretionary Trust borrowers of today be those people tomorrow?
If you’d like to have a confidential conversation about your Hybrid Trust give Ed Nixon a call on
1300 657 132.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).