Mortgage broker Ross Hanrahan said Macquarie Bank’s changes to lending to family trusts could be the start of a big change in the industry. (Source: Strategic Broker/Getty)
Macquarie Bank is restricting its lending policy for property investors after seeing a rise in the number of people trying to borrow money through trusts. Buying property through a family trust has its inherent pros and cons for those looking to protect their assets and reduce their taxable income.
But they’re not for every investor – despite what some people on social media might be saying. A spokesperson for Macquarie Bank told Yahoo Finance this is what has prompted the lender to change its approach in this area.
“Borrowing via a trust or company is a very small part of the market and of our home lending, but has recently become the focus of attention on some social media platforms,” they said.
“The changes we’ve made are part of our ongoing focus on responsible lending, ensuring our customers only take on finance suitable to their individual circumstances.”
The change is due to kick in on Friday, October 31, and the bank will be pausing all new lending via family trust and company structures.
The bank initially had a tiered restriction depending on whether someone was a new customer or existing, and how many properties they had in the trusts.
But it is now going an extra step by pausing this type of borrowing altogether, regardless of the applicant.
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Macquarie made the change in response to ‘finfluencers’, aka financial influencers, promoting these structures on social media as an easier way to borrow money compared to doing it in a person’s name.
The bank, which is Australia’s fifth largest lender, had received a bunch of enquiries from customers recently who wanted to go down this route when it actually wasn’t suitable for them.
It has also received a considerable lift in home loan applications, not in family or company trust structures, and wants to focus on those.
New anti-money laundering regulations are also coming into effect soon, which will require lenders to have additional verification for trust and company loans.
This is expected to make processing this type of borrowing more complex and time consuming for banks, brokers and borrowers.
When property is bought through a family trust, the income gained from that investment, as well as the capital gains, are taxed at the beneficiaries’ marginal rates.
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This means high-income earners can potentially lower their taxable income by distributing to beneficiaries in lower tax brackets because the property is technically not in their name.
That aspect also helps trustees in the event of bankruptcy or legal action.
Because the property is owned by the trust, not the individual, couple, or family, creditors can’t go after it during tough financial times.
This is why homes based in trusts can be beneficial for certain business owners, especially those in high-risk industries.
Those are the main benefits of buying property through a family trust, but not every investor will need them and, as a result, won’t need to go down this route.
Speaking to a mortgage broker or financial advisor will help determine what the best path is for each individual.
There can be plenty of benefits to buying a home in a family trust, but it’s not for everyone. (Source: Getty) · William_Potter via Getty Images
Azure Financial associate director Max Harris said Macquarie’s move was a “bombshell” for the lending industry and could signal that the “golden era of unlimited borrowing capacity” is ending.
He predicted that other lenders could soon follow in Macquarie’s footsteps.
Mortgage broker Ross Hanrahan told Yahoo Finance that Macquarie had been the market leader for property purchases through family trusts and it was “one of the best strategies that they had to offer”.
But he believes that with the rise of finfluencing, this is a way for the bank to reduce risk.
“Macquarie tends to have the highest net worth customers,” he said.
“And what they’ve probably attracted with these influencers is a lot of people that are on lower incomes, less sophisticated, but still have access to the policy. And then it’s being exploited in a way that’s probably not the best for Macquarie’s loan book.”
He said there is a “constant” stream of “rubbish” finfluencer content on social media talking about using a family trust to buy property because it’s “unlimited borrowing power”.
“That’s not the case for people that are sophisticated in investing,” he added.
With Macquarie pausing investing through this method, he reckons second-tier lenders will soon be overwhelmed with enquiries about how to buy property through family trusts.
Finfluencers have become popular in recent years from revealing tips and tricks for superannuation, tax, investing, property, mortgages and other financial areas.
While some come from credible and verifiable backgrounds, others can just be spouting financial advice without any qualifications.
The financial regulator recently cautioned the public to be careful when following what these people say.
“Popularity doesn’t equal credibility,” ASIC commissioner Alan Kirkland said. “Check their credentials and whether they’re licensed or authorised, before checking your money out.”
The Australian Investments and Securities Commission have been zeroing in on finfluencers with little or no qualifications promoting get-rich-quick schemes to attract people desperately trying to improve their finances.
Eighteen Aussie finfluencers were issued notices earlier this year as part of a global crackdown on unlawfully promoting high-risk financial products and providing unlicensed financial advice.
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