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What Is a Secured Trust Loan

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

What Is a Secured Trust Loan and how do they work?

A property can be held in trust for several reasons. For instance, if the beneficiaries of a property left behind in a will are minors, the property in question will be held in trust and turned over to them once they come of age.

Now, suppose that instead of a property, it was cash left for the minors. Let’s further say that the trustees deemed it a good idea to channel this money towards the purchase of a buy-to-let and took out a mortgage on it as an investment for the minors. The mortgage, in this case, would be for a property being held in trust.

Building on the earlier scenario, let’s say the minors need money to finance their education and living expenses. The trustees could decide to free up some of the equity in the home and use it to secure a loan on behalf of the beneficiaries of the estate.

As you can already tell, trust properties are marred with a lot of complexities that only an experienced broker who is well-versed in trust-owned assets can handle.

What is a secured trust loan, and how does it work? This guide explores everything you need to know about this niche area of secured lending.

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What is a secured trust loan?

A secured trust loan is a form of financing that uses an asset held in a trust as collateral for securing the debt. Provided the trustees consent to it and the trust has the power to borrow, any of the properties and assets held by the trust can be used to secure a loan.

It is worth noting that whether or not a trust has the power to take out a loan or mortgage depends on the type of trust and whether it allows for trust-owned assets to be used as collateral for loans.

Most trusts allow for loans and mortgages to be placed against assets and real estate held by them. While there are several different types of trust finance, most of them fall into one of two categories:

Revocable trust loans

Also known as living trusts, revocable trusts can get loans or mortgages from traditional lenders, provided that the original trustees who created the trust are still alive.

The process of getting secured trust finance on assets held by a revocable trust is a straightforward one. The trustees would need to sign off on the loan or mortgage.

Irrevocable trust loans

Revocable trusts become irrevocable when the original trustees who set up the trust die. As the name suggests, once a trust becomes irrevocable, there are no changes any person or entity can make to it.

However, the individuals or entities named as successor trustees in the trust are authorized to act on its behalf. While they can use trust-owned assets to secure finance, most high street lenders don’t typically offer finance on assets held by irrevocable trusts.

They may require that the asset in question be transferred out of the trust and put in the name of one of the beneficiaries. Only then would the lender consider giving finance against the asset in question. If the irrevocable trust only has one beneficiary, a lender would be more open to providing the loan than if the trust names multiple beneficiaries.

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Is it possible to get a secured loan on an asset held in trust?

As mentioned earlier, mainstream lenders don’t typically provide loans or mortgages to properties and assets held in irrevocable trusts. However, specialist trust loan lenders do. Like high street lenders, these niche providers also require the title deed to the property or asset before they can disburse the funds to the trust account.

The main difference between the high street lenders and niche providers has to do with their respective funding sources.

Mainstream banks, credit unions, and similar financial institutions use their own funds for the loans they disburse. Private investors and peer-to-peer lending fund specialist lenders.

Secured trust finance lenders have more flexible criteria and shorter loan processing times. In most cases, secured trust loans made out to irrevocable trusts are usually short-term in nature.

They are designed to help the successor trustees distribute the trust’s assets equally among the beneficiaries. Once the assets have been distributed, the loan is then paid off.

What are the associated costs of taking out secured trust finance?

banker shaking hands with clientsIt’s important to note that the pool of lenders willing to grant a secured trust loan against trust-owned assets is shallow.

These niche providers are few and far between. For this reason, you are unlikely to find the same competitive interest rates and monthly repayment terms characteristic of conventional finance, secured loans and mortgages.

You also need to consider the complexities involved in arranging and administering these loans. The costs associated with these extensive processes are likely to be higher than what you would find on standard secured loans and mortgages.

Regarding loan amounts, most specialist lenders only grant secured trust loans on assets valued above a certain threshold. They don’t consider amounts below that threshold worth the legwork required.

How hard is it to get financing on an asset held in trust?

From a lender’s point of view, mortgages on trust properties tend to have a significantly lower loan-to-value ratio compared to commercial finance mortgages on residential properties. The main trust-owned properties pose to loan providers is that it isn’t always clear who will be responsible for the loan repayments, and here’s why.

On the one hand, you have the settlor (the “original trustee”) who puts the assets into the trust. On the other hand, you have the trustees whose responsibility is to manage the assets in the trust. You also have the trust beneficiaries who benefit directly from the assets in the trust. Sometimes, the beneficiaries also happen to be trustees of the fund.

From this, you can see the amount of due diligence that would be required. The process can be long and drawn out, and it can take a while before an application for a secured trust loan can be approved.

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Why would an asset be placed in trust?

There are several reasons a trust would be set up and assets transferred into it. For instance, if a property is left to minors, it can be placed in a trust until they’re adults. Some people use trusts as a shield against Inheritance Tax, although the practice isn’t as common as it was several years ago.

Get expert help from a trust loan broker

Securing finance or getting a mortgage on a property held in trust is a sensitive and complex area of secured lending. Most lenders, particularly the high street variety, don’t typically get involved with these financing arrangements.

Secured trust loans and mortgages fall in specialist finance and should be handled by experienced brokers who are well-versed in this domain. Loan Corp has experts in secured loans, start your application online below:

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FAQS

Can I use a property held in the trust to secure a loan?

Yes, you can. Keep in mind that most high street lenders don’t typically grant secured trust loans against assets held by irrevocable trusts. However, specialist lenders do.

What happens if I default on a secured trust loan?

If the trust defaults on a secured loan, the lender has the right to repossess that property or asset, sell it, and use the sale proceeds to recover the loan amount owed.

What loan companies offer finance on trust properties?

Most traditional lenders don’t offer finance against trust-owned properties. A few niche lenders do. An experienced trust loan broker can match you with these specialist finance lenders, start your application online below:

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