EP.2 | How Trust Lending Gave Birth to the Perpetual Borrowing Myth

Parag Dixit

Okay, hi guys, how are you? Hi, madith, hi, hi, Julius, I'm good. How are you? Parag, very good. Man, very good. How is being well, pin was

Julius

bit busy. A lot of purchases, lot of client calls. Yeah, not really,

Parag Dixit

not really busy working, waiting for Christmas season to come through. Yes, I hope so. I hope so, right, I'm looking forward to that. I'm so tired. Yeah, I'm so I'm so exhausted, you know,

Mudit

especially this week with the RBAs announcement, this week was extremely busy, lots of many calls, so many people thinking about what's going to happen next. So, yeah,

Parag Dixit

yeah, no, I know I was, I was up in the canes for conference. So that, plus the work, plus everything else put together, it was, it was nice. It was full

Julius

on. It was good, yeah, good busy, good busy, good

Parag Dixit

busy, right? Yeah, good busy. Okay, now good lots have happened right in this, in this week, in this last 10 days, so much has happened in the investment landscape, right? And so much has changed with the banks changing their tune, over the bugbear, right, over the problem for all these years, which we've been seeing, trust, lending and whatnot, right?

Mudit

Absolutely, there's and it's just that some of the news came as a little bit surprised. I mean, it has been in the air for a long time. It has been discussed. Everybody's been thinking that, when will it happen? But suddenly, one bomb by Macquarie, and things start changing.

Julius

Yes, yeah, it was much needed, I believe, yeah,

Parag Dixit

100% much needed. In fact, Macquarie was the second one earlier, about, I think, a month ago, or something, where Westpac group in St George, they started putting a bit of a tightness on it. They said, All right now normal residential channel will not handle it. It will go back to the business channel. And also it's, this was in the horizon, right?

Mudit

Absolutely, it was, it was, it is, I think a lot of people have been anticipating, who have been in the industry, that it's a structure which has been used and abused. Yeah. So it was just about when will it it was not about whether it will happen or not. It was always about the timing. And I think it's an important topic to for us to dwell a bit deeper into what, what is it all about? Why are we saying that things have changed? How does trust structuring and the things around it change? Yeah, yeah,

Parag Dixit

that's That's true. Yeah, because it's been, I see it's been wild over the social media. People have been talking what not, you can just buy, I think, entire Sydney by making trust or something. You can buy as many as you want, perpetual borrowing or something, right? It was just, you don't need to repay all. But that's kind of notions people have been carrying along on this. But anyway, so let's, let's come to the question, why do you why do people really choose to purchase under trust structures. Why do you think people want to purchase properties under trust?

Julius

It was because, when we look at the investment for every investor, right portfolio, making is a key when you can make a generational wealth, or you can make a big impact in your life, when you have multiple properties in your portfolio right around five, six years ago, you had lot of options to buy properties across Australia, around three, $400,000 with around five, 6% yield, because by then the rental was okay, but property prices were so low that your property were taking care of herself, and that's how the early adopters, they bought lot of properties with limited borrowing capacity because interest rates were lower. Because of that lower interest rate, a borrowing capacity was much higher, and then you can accommodate more sets, because our set was cheaper. Nowadays, interest rates are higher. What we could see is people would lot of investor would like to get into the portfolio mapping, but interest rates are higher. Borrowing capacity is limited, and the property prices have gone up significantly, and that's the reason why. And then there's a lot of media noise around

Parag Dixit

I agree with you. I agree with you, but to take it a little bit back, you know, I when the trust structure came up, when they came up, maybe it's been there for decades. But when it started really happening, it was always the noble reason you're so right, because now that borrowing capacity is not there, people are trying to wriggle their way through by opening up trusts and all. But originally, I suppose it was only the people who would be in positions of working in places where they are vulnerable or they are, they're open, exposed, not vulnerable, exposed to any kind of litigation or something. So for asset protection, they will take it, maybe doctors, maybe lawyers, or maybe accountants or some, some such kind of people will take the higher industrialists or bigger businessmen would take that properties under trust. Or you, getting into personal life where you are, you need to have protection. That's where you would do that. Or maybe

Mudit

inheritance. So people would take it for the reasons where the structure, the entity structure changes in the way in which you pass on wealth, or you run your businesses or accumulate more wealth. That was, I think that's the that's why it was created, in terms of that structure was there, right? But over a period of time, there have been noise around that, okay, because of banks looking at the whole loan and liability under different ownerships in a different light, yeah, there were ways in which loopholes were being exploited, and people realized that, okay, there is a way in which you can even if you're borrowing capacity like Julius, you rightly said that the especially because of the property prices, which have gone a lot higher than what they were earlier, people who want to invest in multiple and have a portfolio of multiple properties, it has started becoming more and more difficult. Borrowing capacity starts capping out, and that's where the whole exploitation of this loophole started happening, and people went into the boring capacity that, what can I do? How can I accumulate more, but without a lot of realization of what's the impact of that?

Parag Dixit

Absolutely right, dude, that's you're so right, just with the bit of a maybe greed, maybe bit of a thing about that, okay, I can. I can just accumulate some more and more wealth by doing some shortcuts. There was this, I think, wrong advice, which a lot of maybe including buyer agents or mortgage brokers or maybe accountants or all the professionals around. There are always some bad eggs there. Most of people are great, but there are some rotten eggs which will always spoil it. And then these kind of advices have been going around where you can have perpetual borrowing capacity, you can just buy whatever you can buy, just create trust and some wrong bit of a stuff, which is going on social media with influencers who have no idea about structures, who have no best interest in mind. You know, the industry, the mortgage industry, has always been about best interest in mind, but this is a structure which anybody and everybody has been advising on and and just, just, just taking people for a ride, or people who don't really understand the impact of it over long term, you just get into these structures Absolutely.

Mudit

And I didn't, I think it has been, it is what it was being observed for some time, and I think it was high time that, especially when, when there is so much of regulation around financial hardship, and there are so many rules and policies and laws being put in place that there should not be lending for which can lead to financial hardship for the end user, then this kind of structure has become more important to be regulated further to make sure that the end user, the buyer, who's buying a property, they understand what it is about, what's the positive impact and what's the negative impact, and then get into it. I think that has needed

Julius

multiple scenarios in that situation that a lot of clients I met with without even understanding the complications of the trust, plus what are the expenses to the trust, or how much borrowing probably you have, versus how you structure the portfolio, they start just discussing about the trust. So like few examples, I've seen someone who has around eight properties, and he has around seven eight trust. Instead, you can have multiple properties in single trust, and then you can for the next one, probably because of the bad advice by an accountant, or probably not enough understanding about the trust. Lot of people are creating a single trust for each property. The complications are in trust, you have lot of expenses. Like, it's just not about the word Trust. It's about okay, when you get a property, you have to create trust that is also expense, then you have to maintain that trust that is the annual expense, plus your borrowing capacity will be retained according to few banks policies. But you can't claim negative gearing. So in a case, if suppose your monthly cash flow is not sufficient to have a monthly good saving amount. And in that case, whatever you are losing your trust, if the property is highly negatively geared, then it will impact your entire monthly cash flows. Also, if the property is bit naviged, then you can't claim the depreciation schedule as well. There are other examples, like I was talking to a client when they were advised by an accountant that, okay, the model land in somewhere in Melbourne, and land cost was around $300,000 and then accountant give them a suggestion that group of around 20 people get a unit of 15,000 each. And then they created 15 they created 20 units to hold that land while when they were doing the calculations, for an example, over the 10 years of Horizon, or five years of Horizon, if that land would have been become doubled or become $600,000 still it didn't happen. But what I meant to say is they have created a trust. So in that entire exercise, the accountant made around around 50 grand to create all the trust they've hold that land for around five years, and then you've made like 20 times. For an example, is $1,500 $30,000 a year. So it's around 150 grand of expense, and they sold that land for the loss.

Parag Dixit

Oh, my goodness. Oh my goodness. And. That's like, that's a good that's such a right example of a bad advice around creating trust by someone who's kept his or her interest in mind first, versus the client's interest in mind. And that is exactly what we've been talking about. I've in my mortgage broking. We've also seen clients like that. We've seen clients who would not understand how much of an expense it's going to be when they get into it, and then they realize that, okay, I have to, I have to pump in $2,000 $3,000 every month into the trust just to keep it alive. It's then they will go initially, they will feel all right, I'm buying a property, and they let me buy another one, and they'll go ahead and they'll declare that, okay, I'm able to the trust is able to take care of it, and then borrow something else and buy another property. And now you're reaching a situation where three, $4,000 is going into a trust just to be sustain that property, and it's not impacting you in terms of, you can't claim any negative gearing. You can't claim tax benefits. The losses accumulating in the trust. There is more trust expense which is coming through. You're not able to do anything with it. And on top of it, you will, you will, may find that I don't know how they manage that, or they understand that or not, but they see that there's a land tax issue which comes through, this capital gains tax issue, which there's heaps of other stuff which will come through, and eventually you find that I can't hold on to that property, God forbid, if you're selling at a loss, like the way Julius you've explained, yeah, oh, then you've then, what were you doing all this for?

Mudit

100% correct? And it's not just one or two, it's not one or two outliers who are coming with this kind of notion. I have clients who who have gotten into multiple trust creation. I have a lot of clients, and I speak to them on a daily basis, and then they talk about portfolio creation, and they have been talking about it in two, three years. They say, Okay, this is not sustainable. It's not a sustainable portfolio. I can manage. The cash flow itself becomes killing, starts killing them, and especially for people when, like, he was talking about interest rates, right? So when the interest rates were low, it was relatively easily manageable because the rate is low, you're getting enough rental income, so whether it doesn't matter whether it was in a trust or in personal name, but the moment interest rates went up, the same portfolio which was easily manageable earlier, started becoming more difficult to manage now, but interest structure, because of negative gearing issues, it starts it is even more difficult. And I know of clients who are forced to sell property which they bought under this structure, and they are like forced to sell, not not willing to sell, not because of capital gains. They have made it, but forced to sell now doesn't matter whether it is at a loss or not.

Parag Dixit

Oh yeah, correct. And, and such times you may have sold at a loss, and there's a loss which is residing in the Trust for years and you can't do anything about it. The only way you can do is either write it off or maybe buy another property and hope that goes for the best. I don't know what they can do for that.

Julius

Yeah, in trust, basically, as mudit rightly said, the type of asset which you look for in the trust has to be either neutrally geared, or when you buy the property, you should have an objective. If I'm buying something, what I'm going to achieve with that property. It's just not an asset which you're going to hold, because there are a lot of talk about, okay, you just take a leverage. But if, suppose, if you're holding an asset where, if it is a bad asset, not rightly due diligent, or not rightly research product, then if you're buying it on your personal LEM, for an example, then you can hold it for around two to three years. If, suppose, if it is not growing in good capital value, but enough you're making it on, at least on the negative gearing. And if you're not able to sustain it, then you can liquidate it or but in a trust, in a case, if, suppose, if you're buying something where that asset is not able to take care of itself. So you're going to pump the money which is a loss, which is a loss, which you're going to accumulate. And if, suppose, if you're not able to manage that product for longer time, in x3 years, for an example, you have to sell it, then amount of losses which you're going to accumulate at the same time will be your net loss because, and if that, if that asset is not going to make any capital growth, then it's a complete net loss. That's what the asset selection in the trust is very important. That's objective has to be clear. For an example, if my cash flows is okay, I can maintain $2,000 negative every month for next 10 years. And according to all the historical data, in 10 years, my property value become double. But if I can hold it, then that's something which okay for me, but that is not for everyone. Yeah. And as you rightly said, during covid Or when the interest rate were lower, there are a lot of people, those who hold property on individual name, they just hold one property. So when the interest rate went up, they have to deal with only single property. But because of the trust structure, lot of people went into 345, properties, yeah. And now the entire burden is on all the properties where, if you buy right wrong asset, then you're not able to liquidate it. The moment you have a cash reserve, you're gonna put from the cash reserve, but there'll be time when you're gonna finish your cash design, you'll be in trouble. Then you have to sell in cost. So there are a lot of the repercussions I've seen lately when. The interest rate went up

Parag Dixit

absolutely right? No, I just just to ask you something on this, why do really people but maybe, what kind of trust do people create, and what do they think? What do they what are they looking at when they are trying to open a trust and buy property? What? What types of trusts are pretty common. So

Mudit

generally, there are two common types of trust that people can create. And of course, when people want to know this is they can understand more with accountants, but just broadly talking in general, that there are unit trusts, and then there are family trusts that can be created. And each Trust has its own reason. What why it exists, and what's the purpose of that? So if you're investing as a family, you husband, wife, they are members of it. They can have kids as kids, as the trustees on that, beneficiaries on that. And when you're doing it, not inside your family, but with some friends or some some relatives or somebody, then you can have unit trust. So there are, broadly these two types of trust which can be created, and you can have units, and you can hold that in the trust. There are implications of each one of them. How do you change the beneficiaries. How do you there are tax implications. There are land tax implications, capital gains tax implications. So before deciding into what trust suits you or why, first of all, by create a trust, whether from the idea of whether it is about inheritance, whether it is it is about portfolio balancing and finding some properties which are, let's say, in certain cash flow, combining with them others. Those are the reasons for

Parag Dixit

which I think land tax, stamp duty that also comes into play when we're starting to form a trust, and you need to, you need to get in touch with your lawyers. You need to get in touch with accountants. You need to get in touch with mortgage broker or various parties get involved, not setting up a trust, I don't think so. Mortgage brokers are involved there, but at least an accountant and a lawyer are involved there. You should have your terms very clear. And then when you get into properties, then you need to have all that mortgage advice and all that stuff which is, which is important for someone to get through, right? Yeah,

Julius

generally, when I sit with the client, what I've seen is, when they come up with the name called trust, okay, I would like to get into the trust and buy a property. But when we get into the detailed discussion about how we gonna use the trust, how to create the trust, what are the entities to be involved, you have to go to the solicitor for the for an example, legal advice. You have to check with an accountant. There is an accounting cost, then you can't claim negative gearing, or you can't claim the depreciation. Then you go to the bank, the interest rates a little bit higher too. So when we discuss all of these, then lot of people put off so it's not only about just hearing about trust and get into the trust, rather than it's about understanding your financials first.

Parag Dixit

And do you do? Do you see that as a mortgage broker? I see it a lot of times when someone will come to me and tell me, I want to take a loan, and I'm looking to buy a property, and I'm looking to buy it under a trust, and I'll ask them, Do you really want to buy under a trust? But why do you want to buy under a trust? Have you really thought about it and what? What are your objectives? Why do you want to do that? Do people come to you asking, I want to buy a property, and I want to buy it

Julius

under a trust? Yeah, it's very common conception nowadays that everyone just come and ask for a trust, because every investor is looking for a bigger portfolios, and then that is already been embedded in lot of people's mind because of lot of media, news, Facebook articles, professional friends, so when they come it is already been clear to them. Okay, the moment I start explaining about the trust, there are a lot of people who sometimes understand they don't look at the trust because we sit with the client. We understand their objectives, financials, and according to their financials and objective, we have to define whether it is achievable or not. Yeah, it's not just about okay, I can give you a plan on paper and then Okay, say it is gonna because you need to have that

Parag Dixit

income, absolutely that income. That word is the right word. You need to have that income. In the end, trust is not going to get a gold mine somewhere. Trust is going to it's just a holding structure, and you it doesn't have an income of its own, the income is yours, right? And if you don't have the income, you are guaranteed to the loan. And if something goes wrong in the trust, you got to pay that money. And then if you don't have the money, where do you go? Absolutely,

Mudit

I think that's where the whole sustainability of so that's where structuring it in the right way becomes very critical. That you are the guarantor your income will be used. So if you're borrowing, capacity for a normal property under your name is getting constrained. There's a reason it is getting constrained because you don't have the capacity to repay the loan if you take that correct. Now just creating a different structure, but your income is not changing. So how does it help in terms of buying another property, which otherwise you are not able to borrow money for but now we create a different structure just to get money, but everything else is still the same,

Parag Dixit

absolutely right? So, yeah, I think, I think people get motivated by a greed which comes through, or people get motivated by a temptation which comes in a short run that, okay, I'm going to make a big portfolio. Out of something, and I'm going to make a large portfolio, and I'm going to have a great wealth creation. And you forget the long term, you forget the 30 years you're going to spend on a property. And I suppose a lot of dodgy or ill informed people who themselves are not aware of what they they are suggesting, they also kind of promote it a bit and then trying to sell, maybe what they want to sell, or maybe just trying to give an advice to look intelligent, I suppose. Yeah,

Mudit

that's right. So that's 100% correct.

Julius

A lot of people get carried away about like, for an example, if I would have started my portfolio journey around five, six years ago, these things were possible. Lot of things will lot of people were carried away by seeing their friends what they have done. And then that is just not advice this friend is giving them, but it's about you need to understand whether it is suitable for you or not.

Parag Dixit

Absolutely correct? Yeah. You need to understand whether it's suitable for me or not. Me is different than you as different, right? And we are all different, and then that, that's what somebody who's who's not qualified to suggest, doesn't understand. So they like cookie cutter rice, take trust, buy properties, become rich. You know, that's that's not the way it is. Absolutely. A lot of

Mudit

people, straight away, come and ask mudit, my friend, he earns less than me, and he has two properties, and he created a trust for them. I have more income, but I'm not able to buy two properties like him. So where am I going wrong? Of course, it's a very genuine question that, why do you think somebody else who has similar income or less income is able to do it, but then, if the other person has not done in the right way, or did not understand what that what he or she did, then you don't have to make the same mistake. Just because some other, somebody else did it. You want to do it is not the right reason. You have to understand the implication of that, the negatives and positives, both negatives, the risk of it is very, very critical to understand, right?

Parag Dixit

Okay, so we've been, we've been talking about these trusts, and I understand how people have got a wrong notion. So let's, let just, let's just maybe, if you can tell me, so with the impacts of creating trust, I'm sure there are positive as well. There are negative as we'll be talking about negatives and we were talking about positives, there would be definitely we're talking of negatives. Maybe we can talk more negatives. But what are the negatives and positive impacts of having a trust structure?

Mudit

See, we have to very, very valid point, and we have to go back to understand why is a trust make sense? What is the reason of creating one? So, like you rightly pointed out in the beginning that the reason behind why the trust were created was probably first is asset protection, that if I am a person in a certain kind of profession, I want protection of my asset. I want to make sure that if something goes wrong, then my entire portfolio doesn't go for a toss. How do I how do I do that in a legal way? So the protection of assets becomes a very, very valid reason to do that. Right? Was

Parag Dixit

portfolio creation also a reason?

Julius

Yeah, so if you select the right asset, where you buy a property with good cash flow sitting in it, and if it is a high capital growth asset, that means if that asset is taking care of itself in higher interest rate, like unicorn asset, then you could have multiple assets selected within the trust, and you can build a sizable portfolio.

Parag Dixit

Yeah, that's that's a that's a good way of looking at so if you maybe, if you are a complex investor, maybe if you know what you're getting into, maybe if you have genuine ways of making a trust positive, whether whether by trading or whatever you do. But in there are genuine ways of doing that, and you understand, and you understand how to create a portfolio, balance a portfolio, have a sustained thing, then that maybe is, is a way, there's a positive impact of creating trust, which can come up into people, but I think there is holding costs as well, which will come along when it comes to that. And people should be, should be aware that there is a big holding cost to our trust. So unless you are really getting a benefit out of it, whether it's short term, immediate or long term, that holding cost is going to eat away what you are trying to achieve by by opening a trust and buying properties under a trust as well. Right? Correct.

Mudit

Correct, absolutely right. So holding cost both in terms of one is the fixed cost of accounting, etc. That is one part of cost. Second is because you don't have negative gearing on a on a yearly basis, you can only keep on accruing losses, and then when you sell the asset, then you can get your from a capital gains. You can adjust your losses and profit there. So holding cost in terms of fixed cost, plus the cash flow impact of it. Those are very important to understand, because even if it's even if you were, let's say if you were to get a $6,000 of tax at the end of the day in a negative gearing, it's a $500 per month for somebody now, people, depending on the income, depending on the borrowing capacity, income, especially and. Savings that $500 can make or break things for you. For many people on a monthly basis,

Julius

I've seen that actually. I've seen with someone that if you hold property in Sydney, for an example, owner occupier at 6% interest rate, with 1 million loan, you'll be paying around $6,000 if your family income is around 12, $13,000 and if you hold one property in Sydney after that, with the daycare expenses, your monthly expenses, yeah, if you're saving around one to $2,000 a month, and most of the properties are at least $1,000 negative, so that means yours 50% of your cash reserve every month, yeah, yeah. And

Mudit

especially with the kind of inflation we are seeing now, because of which RBA is forced to take what they are taking their view on the rates, it becomes even more difficult in the inflation inflationary

Parag Dixit

scenarios. Yeah, but I think, I think another one of the another reasons, which I have seen investors wanting to get into trust is also someone who understands the land tax bit, someone who understands the capital gains benefit, how they can really have mix of properties, and they understand that I can Okay, if I, if I buy, if I'm able to afford to buy multiple properties, and I have a large borrowing capacity, and have a capability to handle those properties, and hence, I can balance my portfolio between various states and various holding structures so that I can minimize my cost and I can amplify my capital gains as a benefit. Then again, I'm looking at something positive out of it, right? I'm able to benefit out of out of being able to keep my costs lower versus what would have happened if I would have bought everything in NSW or anything in Victoria or some other place? So you

Julius

need to be informed about what you're gonna do when you're building a portfolio, as well as when you are involving into the trust. Yeah. So not every asset is suitable in trust. So for an example, if you look for one asset which is highly capital growth, definitely the high chances that it will be highly negatively geared to Yeah. Then when you're managing your cash flow, because cash flow management is something which we have to learn. And then complex investor probably know better, because when you getting into it, you should know if suppose my monthly outgoing is $6,000 and my inflow is not around 5800 to $6,000 then it's not long term sustainable. So in that case, probably I'll look for a next asset which will be either housing granny or the duplex, or any property which is high in cash flow. Yeah. So that means you can't have all same type of assets in a trust and then have your portfolio to be highly negatively geared. So balanced portfolio with the right planning is very important when you're getting an asset into the trust.

Parag Dixit

True, true. That's right, the balance of the portfolio is very important, and that balance is critical. But yeah, I get what you're saying. So we can, we can get taxation benefits. We can have a larger portfolio. We can have, we can have a sustainable portfolio, if we understand what we are getting into. But if I am a PAYG employee, and if I have no opportunities to be able to make my trust into A into something which is positive, or something which it can handle itself, then it's it may not be a great idea to get into a trust kind of an ownership structure, right?

Mudit

Correct? No, absolutely, right. So a selection of the kind of assets. Second is, how do you how do you make your trust positive? Then there are multiple ways in which you can think about if you have a side gig, for example, then you can you, can you do it under the same trust? Can you add profitability to it if your current portfolio is not sustainable, you, if you're buying investing in stocks. Now, can you do it in the under the same thing? There are ways in which types of asset I've seen people who have residential property and then they have a commercial property to balance the cash flow. So because this one is negative on the cash flow, this one adds a bit on the positive side. So although this may be a bit of like, like every property, some properties are great on cash flow, some properties are great on capital growth. So balancing cash flow versus capital growth in different properties under the same trust can help you balance your portfolio better,

Parag Dixit

absolutely right. No, that's a good point. So to how do I make the trust positive? So that's a nice point which you put out Modi, and I think a side gig is a very good bit in which I can do balance, try and balance out my trust and make it positive. I can definitely add my other business bits, which I can bring into it and do some stock trading if I'm doing to bring into IT business. I've seen a lot of people have, it's not a it's not a very asset protection friendly structure, but still have seen people having their small business also contributing into the trust so they are able to make positive, maybe a home business or a side business, which I've seen, you know, the families are doing together, and then they will use that income to put that into the trust, and take that income in the trust to make it positive. So that means you can sustain yourself. But I think a large important. Bit would be how you can balance out the asset itself. So if you've got a property which is highly, say, cash flow negative, but you're hoping that it will be a brilliant capital generator, for me, you can always have another property which is in there, which is a very good cash flow generator, which may not be as great in a capital growth, but then you've balanced out the whole thing, and you it's not going to come on your head that have to pump money from the pocket just to keep it alive, right? Alive? Yeah, yeah. It's a risky situation,

Julius

right? Yeah, it is. It is. And basically, I've seen in lot of investors, those who are very smart, they have done that effectively, like when we are building a portfolio, and then the lot of investor we sit with, we try to make that happen to so the entire portfolio will be balanced, and that is very important. Lot of people does that mistakes about, okay, just buy because capital growth versus cash flow. Lot of investor doesn't understand about it, yeah, they just go carried away and then start getting into the trust and until, unless that trust is not pinching them, it's fine. But there are a lot of times when, yeah, I've seen them, the trust will be working in, not in their favor, yeah, versus and then if the right asset is not selected, and if they are not making enough capital growth, then their situation that they have to liquidate it.

Parag Dixit

That's true, and that's a shame, you know you, you do all this bit and you this, not only the money and the finance which comes into it, it's also about the expectation of the families. You've got a long term goal into it. You're looking forward to achieving something. Some people will come and say, oh, I want to get financial freedom, or I want to upgrade my house, or I want to go and visit the world or Europe or something, and it's all gone for a vein, right?

Julius

It's just time. By the way, you're losing time because in investment, amount of time you're going to spend was timing in the market and time in market both important. So if you're losing lot of time, which is important to select the right asset and make a good portfolio. Make a generational wealth if you're selecting the wrong asset or due to the wrong structure, for an example, that asset is good. And then if you're not into the right market cycle timing, but in next three, four years, probably that property may perform, but if you're not able to hold it, then you have to liquidate it.

Mudit

You have to liquidate it. You can't do anything, and it adds so much of stress. One is, of course, what you're going through, what the family is going through. You had the expectation, and you made your plans accordingly, and what you're going through, the stress adds a lot to it, right? And I think the sad thing is that people who are trusting the professionals to give them the right advice. I think what is important here is that, of course, you need advice from the professionals, but you also need to do your own homework to understand and ask the right questions that, what is, what is the positive in it? What is the negative? What if this happens, then what, what, what will be my financials like? I think asking those questions with the professionals is more is very, very critical when people are making these,

Parag Dixit

yeah, true, true. I think, I think looking, I think this, this voices reach the banks as well. And that's why we saw the kind of a reaction which has happened, but it's all not. It's all not. The interesting part is, and which is, which is so good to not good to hear, but it's so interesting to hear, see and read. Some banks are retreating, whereas some banks are saying, Okay, I am interested to go more into it. So whether it's an exposure thing, which they have, or it's their different lessons, which they have learned from their internal portfolio, we don't know they would know more. But if I, if I see when Macquarie said about a week back that that's it, I'm hanging my boots. I'm no no more trust lending at all, though, one day ago, they had said, Okay, we'll climb down. We'll do this, and that will only one trust per person and all that. But next day, no, no bank, and that's it, gone, done. We're not doing any trust lending, correct? And that's it. No further lending. It to a same trust, no doing anything. So whatever it's there, it's we are done and dusted in this industry that there was Westpac group, which said, Okay, we are tightening. But on the other side, on the other side of the spectrum, right

Mudit

bank is getting more lenient on on the trust they are saying that they will take in the boring in the boring capacity calculation. They will take negative gearing into account in the trust structure, while actually most banks don't take it, the bigger banks have not been taking it. Combat was also not taking they may have gone the on the other end, yeah. So you're right that based on their portfolio and their experience, they are seeing an opportunity in that space. So then there are tier two lenders who, some of them do take negative gearing into the trust calculation. So by by the nature of their business, they have higher risk appetite, yeah, so they are ready to take that risk and absorb that because they have higher margins there. Yeah, so banks and lenders are on both

Parag Dixit

sides of it. I think both sides of it, and I think they are understanding, and they are they are trying to differentiate that, okay, there are some elements who should not have got into asset situation because of this loophole. It. But there are a lot of genuine guys as well who are doing the right thing, who have all this all these years, have been accumulating wealth or buying properties or doing things in a trust structure, which, which, which is the right stuff to do. But I think at a point of time now, they are, they are saying, Okay, we let's not for some bad guys. Let's not put the good guys in a problem or in a risk we or maybe penalize them. So they are saying, Okay, let's grow further into it, right? And let's allow people to go in. Is that right? You see a lot of people coming to you, Julius, with saying that, Okay, I'm coming with a major banks first with the trust lending, or they come with smaller lenders. What do you see?

Julius

So nowadays, lot of investors are coming with the options of secondary tier lenders. Yeah, right. The moment the Macquarie and the invest back, they tightening the rule. There are a lot of what I've seen is lots of people, lots of investors, are coming up with the secondary tier lending options, yeah, because without understanding the impact whatever you were discussing from last few minutes, they still want to get into the trust, and then they had, still have enough options to get into the second tier lenders.

Parag Dixit

All right, yeah, no. But secondary lenders are not bad. It's they're not high on interest rate, but what they are, they are also, and I'm seeing a lot of people are lot of other second tier lenders are also coming back and asking the questions, all right, you've got two other entities, or three other entities or one other entity, and what are you doing there? And at least go back and talk to your accountant and come back and tell us that. All right, everything is good, and you're able to take care of it. And most of the times when accountants will sit down, or a financial advisor will sit down with the person, they will be able to advise that, all right, this is not so. It's not such a happy world. You know, you need to be sure of what you're getting into. It's not, it's not just you can do whatever you

Mudit

want. I think you're right. The I think the onus is on professionals like us, from whoever is relevant in terms of the finance and the property side to be more responsible about what advice we are giving to people.

Parag Dixit

Yeah, and that's true then, and that advice bit should be, should be able to understand and appreciate the circumstances which somebody is in. And it's not about, it's not, it's not a get rich quick scheme. It's, it's a it's a product. It's a holding entity. It's just a product. It's a means to doing it eventually, like we like we were saying, it's the income which is important, and that income, if it's not there, then we are, we are in trouble, right?

Mudit

I think the you rightly said that for for mortgage brokers, us for this best interest duty, that we have to always know interest, as in, not the interest rate, but better best interest. Duty is that it is your duty to think about the best interest of your clients. I think something like that should be made mandatory for for other professionals as well. How will they implement it? I am not sure, but I'm saying that whether it's accountants or financial planners or buyer agents or real estate agents, how do we get this for for everybody?

Parag Dixit

Oh yeah, it blows my mind sometimes. You know, just to think about it, that as as a mortgage broker, we will have to give an advice or some suggestions to people, recommendations to people in a particular format, and you're looking at someone's best advice interest in mind, whereas there are people who have just not bothered. They can do whatever they can, and they can advise on whatever they can and that that's, that's that that's what spoils it. But I think that's also going to change the way this the trust lendings future. It looks like, right? There would be a bit of a thing which you which you think will be changing the way people are going to buy under trust. It's going to change the way banks are going to look at lending into trust. Then I'm pretty sure there is going to be some more tightening in the horizon, right?

Julius

Yeah, we could say that you can actually see that it's happening at this stage and and sometimes it's necessary to do that, because the way the portfolio creations or the campaign which has been generated that to get into the trust lending, lot of investors are getting into the trap and committing the mistakes which can take the entire financial freedom towards the cost. So it is happening, and then we are seeing that on Horizon.