Q: My portfolio landlord client is looking to refinance in order to reduce monthly repayments, but they have set everything up in a Trust. I have no experience in this area. What do I need to bear in mind? Do lenders even accept the use of a Trust?
Anna says: Firstly, you’ve come to the right place, as Hampshire Trust Bank – working with specialist solicitors – can deal with Trusts. However, that is not the norm; it’s important to understand many lenders will not accept cases where a Trust is the owner of a property.
A Trust is an arrangement which allows a person or a company to own assets on behalf of another person, family or group of people. These people are known as the Beneficiaries of the Trust. Assets are owned on behalf of the Beneficiaries and are controlled by a Trustee, who can either be a corporation or an individual. The Trustee is governed by a Trust Deed which sets out the rules that the Trustee must follow and also covers how any profit is distributed to the Beneficiaries.
Asset protection is probably the biggest attraction of using a Trust. Assets held through Trusts are not legally ‘owned’ by the Trust’s Beneficiaries, meaning that Trust assets are protected from the liabilities of those Beneficiaries.
A recent case with the Bank serves a useful example of things to bear in mind. The adviser’s client was paying capital and repayment on a large 60-bed HMO and wanted to release equity and save money each month by reverting back to interest-only. Not only was this a specialist property but the borrowing entity was a Family Trust.
We were approached as a specialist lender due to the complexities of the property and the nature of the borrowing entity. Not many lenders will consider large HMOs due to the responsibility/costs of owning such a large complex property and the knowledge required to understand Trust Deeds and the additional due diligence involved.
Along with the usual responsibilities on a single-property home, HMO landlords need to adhere to significant requirements before letting an HMO; it is essential to understand and comply with these obligations. Large HMOs, although generally very profitable, mean increased work for landlords, as all tenants will need a separate contracts, daily management and repairs.
As a lender we were comfortable with this transaction for a number of reasons. Firstly, we have a knowledgeable team that understands Trust documents to establish the Trust type, location, the identity of the Trustees and the ultimate Beneficiaries, and most importantly in our case, its power to borrow money using the assets within the Trust as security. In addition, we use specialist solicitors that advise and facilitate the additional legal due diligence involved with Trusts.
We protect the Bank by having appropriate guarantees and indemnities, and our underwriters are highly experienced in the complexities of underwriting large HMOs and understanding the requirements of the customer.
Due to the expertise of the Hampshire Trust Bank team, we were able to assist our broker at the early stages of the transaction and offer a loan to his customer, reverting back to interest-only, saving them a significant amount of capital each month.
Ultimately, you need to establish from the outset whether a lender you’re looking to partner with, will not only accept the use of a Trust but also has the actual experience to complete such a typically complex transaction. We have all heard about cases where a lender says it can handle complex cases but, having used up valuable time, the case falls over and the broker and client are then back to square one due to the lender’s lack of real world experience in this area.
As a broker, you don’t need to have Trust experience yourself but you need to be able to ensure all the necessary documentation is readily available to the lender and its solicitors. If you do, and the lender knows what it’s doing, then there’s a very good chance all parties will be satisfied with the outcome.
Anna Lewis is head of new business, specialist mortgages at Hampshire Trust Bank