A family trust can also be discretionary, so the label on the deed matters less than what the deed says. How lenders read trust structures, who can benefit, and what that means for affordability when trustees want to borrow.
Trust terminology can make property finance sound more complicated than it needs to be. One of the first things to understand is that “family trust” and “discretionary trust” are not necessarily two completely separate categories. A family trust describes the purpose or group of people involved, while a discretionary trust describes how the trustees can exercise discretion under the trust deed.
For mortgage purposes, the important question is therefore not simply which label appears on the paperwork. The lender needs to understand the actual legal structure, who the trustees are, who the beneficiaries are, what the trustees are allowed to do and what the property is going to be used for.
A discretionary trust normally gives trustees discretion over distributions to beneficiaries within the terms of the trust. A family trust may be established for the benefit of family members and can itself be discretionary in nature. The trust deed is therefore more important than the label. If you are applying for a mortgage, the lender and solicitor need to work from the actual documents rather than assumptions about what a particular type of trust means.
From a mortgage perspective, lenders generally want to understand the people behind the structure, the property and the proposed repayment. They may review the trustees, any guarantors, the source of the deposit, the intended occupancy or investment use and the trust documentation.
Different lenders can reach different decisions because their risk appetite and criteria are not identical. One lender may be prepared to consider a structure that another does not, which is one reason specialist mortgage advice can be valuable.
A discretionary trust can have a class of potential beneficiaries, with trustees deciding how benefits are distributed within the terms of the trust. A family trust may similarly be set up to benefit family members. The exact rights of beneficiaries depend on the trust deed.
For a mortgage application, the key issue is whether the intended use of the property is consistent with both the trust and the mortgage. If a beneficiary is going to live in the property, for example, that should be made clear to the lender rather than treated as an incidental detail.
Trustees can enter into borrowing arrangements where they have the relevant powers and a lender is willing to provide finance. However, a lender may require guarantees or other security from trustees or connected individuals. The legal position should always be checked by the solicitor before the mortgage is committed.
Potentially, yes. The exact assessment depends on the lender and the mortgage type. A lender may look at personal income, business income, rental income, trust assets or other financial information depending on the circumstances. There is no universal affordability formula for every trust mortgage.
This is particularly important where the trust itself does not have a conventional personal income profile. The lender may need to understand how the mortgage will be serviced and what additional security or guarantees are available.
A trust can potentially hold more than one property, subject to the trust’s powers, legal advice and the relevant lending arrangements. Each additional property can introduce another set of lending, valuation and affordability considerations.
If a trust already owns property and is looking to acquire another, it is worth explaining the full portfolio to the lender or broker. A lender may consider existing commitments when assessing the new borrowing.
The decision to use a particular trust structure should not be made solely because someone has heard that it makes getting a mortgage easier. Trusts can have wider legal, tax and estate-planning consequences, so the structure should be established with appropriate professional advice first.
Once the legal structure is clear, AB Mortgages can help explore the mortgage side of the equation and identify lenders whose criteria are compatible with the proposed arrangement.
A discretionary trust describes a trust in which trustees have discretion over benefits within the terms of the deed. A family trust describes a trust established around a family or family-related group of beneficiaries. A family trust can therefore also be discretionary. The actual trust deed is what matters when assessing the mortgage.
The types of property that can be held depend on the trust’s powers and the legal and tax advice behind the arrangement. From a mortgage perspective, the lender also needs to be willing to finance the particular property and intended use, whether that is residential occupation, letting or another purpose.
They can, but the distinction is not simply based on the name of the trust. Lenders look at the actual structure, trustees, beneficiaries, property use and borrowing arrangements. Their criteria differ, so two trusts with broadly similar family purposes can still produce different lending outcomes.
The beneficiaries are defined by the trust deed, and trustees exercise their powers within that framework. A discretionary trust can allow flexibility over which eligible beneficiaries receive benefits. The precise rights and tax consequences should be explained by a solicitor or tax adviser.
Potentially, provided the trustees have the necessary powers and a lender is willing to lend on the proposed structure. The lender may require guarantees or other security, and the solicitor should confirm that the trustees are properly authorised to enter into the borrowing.
It can. The lender may need to consider personal income, trust income, assets, rental income, existing commitments and any guarantees depending on the case. Because underwriting approaches vary, the same financial circumstances can be treated differently by different lenders.
It may be possible for a trust to own multiple properties and have borrowing secured against them, subject to the trust’s powers and lender criteria. The lender may also consider existing mortgages and commitments when assessing further borrowing.
Consider the legal purpose of the trust, who the beneficiaries are, how the property will be used, tax implications, ongoing administration and how mortgage finance may work. The trust should be established with appropriate legal and tax advice before you choose a mortgage lender.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.
Written by
Ashley has spent over 20 years in property, building and selling two estate agencies before founding the firm. He leads residential, buy-to-let and protection advice at AB Mortgages, and the complex, high value cases at AB Specialist Finance. His standard is simple: every client gets MD-level service.
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