Can a family trust invest in private mortgages in NZ? The Trusts Act, the paperwork and the tax

Can a family trust invest in private mortgages in NZ? Yes, if its deed allows. Section 58 of the Trusts Act 2019 lets trustees invest trust property in any property, subject to the deed, and section 30 requires them to invest as a prudent person of business would. The loan and the mortgage are in the trustees’ names.

Family trusts are among the investors who co-fund loans with HomeSec Business Finance, a private business lender lending since 2004, with its New Zealand office in Auckland. This guide covers what the Trusts Act asks of trustees, how a co-funded loan sits in the trust’s name and how the income is taxed. Your trust’s lawyer or accountant can confirm how it applies to your deed.

Why are trustees looking at mortgage investments?

Because cash has become expensive to hold in a trust. Since 1 April 2024, income retained by trustees has been taxed at 39%. A big-bank 12-month term deposit paying about 4.05% in late September 2026 nets roughly 2.5% after that tax, while inflation ran at 4.1% in the June 2026 quarter. In real terms, the trust’s cash is shrinking.

Many trusts also hold rental property or shares. A loan secured by property sits between the two: a contracted rate for a defined term, secured by a registered mortgage, without the trust owning another building. The question is how to do it within the Trusts Act and the deed.

What does the Trusts Act 2019 say about investing?

The Act, in force since 30 January 2021, sets the framework in three sections.

• Section 58: the power to invest. “A trustee may invest trust property in any property”, subject to the terms of the trust. There is no list of approved investments; a secured loan is property like any other.
• Section 30: the duty to invest prudently. When investing, a trustee “must exercise the care and skill that a prudent person of business would exercise in managing the affairs of others”. A higher standard applies to professional trustees, or anyone claiming special expertise.
• Section 29: the general duty of care. A trustee must use the care and skill that is reasonable in the circumstances.

The Act has no provision specifically about investing in mortgages. What it asks is a sound, considered decision, recorded properly. The text is set out in the Trusts Act 2019.

What should trustees weigh under section 59?

Section 59 lists matters a trustee may consider when investing. Several map neatly onto a secured loan.

Trustees don’t need to tick every box. They need to show they thought about the ones that matter for their trust.

Can the trust deed change these duties?

Partly. As Chapman Tripp explains, the Act has five mandatory duties, such as acting honestly and in good faith and acting in accordance with the terms of the trust, which cannot be excluded. It also has ten default duties that the deed may modify or exclude, and the prudent investment duty is one of them.

In practice, that means reading three things in your deed:

• The investment clause. Does it allow lending money and taking security, or restrict the trust to certain assets?
• Any change to the investment duty. Some deeds widen it; a few narrow it.
• How trustees decide. Acting unanimously is a default duty, so unless the deed says otherwise, every trustee must agree to the investment.

Trustees must also keep core documents, including records of trustee decisions. A short minute recording why the loan fits the trust is good practice.

Whose name goes on the mortgage?

The trustees’. Trust property is held by the trustees, so everything is done in their names, as trustees of the trust, or in the name of the trust’s corporate trustee.

When a trust co-funds a loan with HomeSec, the loan agreement is prepared in the trustees’ names. The borrower signs with their own lawyer. The mortgage is registered with LINZ naming the trustees for the trust’s exact contribution, alongside HomeSec. The trust transfers its contribution from its own bank account at settlement, and principal and interest are paid straight back to that account, not to HomeSec and not to a trustee personally.

That keeps trust assets separate and the paper trail simple: a loan agreement, a registered mortgage and repayments landing in the trust’s account. The full process is in how private mortgage investment works.

How is the income taxed?

Interest earned by the trust is taxable income. It is not subject to GST, because lending is a financial service and an exempt supply.

• Trustee income: taxed at 39% from 1 April 2024. Under the de minimis rule, a trust with net income of $10,000 or less in a tax year pays 33% instead.
• Beneficiary income: income distributed to beneficiaries as beneficiary income is taxed according to their circumstances, not at the trustee rate.
• RWT: the trustee rates for resident withholding tax are 17.5%, 30%, 33% or 39%.

As an illustration, NZ$250,000 lent at 12% p.a. for 12 months earns NZ$30,000. Retained as trustee income at 39%, the trust keeps NZ$18,300. The same sum in a term deposit at 4.05% earns NZ$10,125, or NZ$6,176.25 after 39%. These figures assume the loan is repaid on time; the trust’s accountant will confirm its position.

What are the risks for a trust?

A mortgage investment is not a deposit. The Depositor Compensation Scheme covers up to $100,000 in standard accounts at licensed deposit takers and does not cover investments. The main risks are a borrower repaying late or defaulting, and the time it takes to sell a property if a loan must be enforced under the Property Law Act 2007, which starts with a default notice of not less than 20 working days.

HomeSec limits loans to 80% LVR on residential property and lower on commercial, makes no construction or development loans, and puts its own money into every loan. If a borrower defaults, HomeSec manages the process with specialist lawyers. The difference between first and second-ranking security is explained in first and second mortgage investments.

On liquidity, there is no pool to freeze. If the trust needs its money early, HomeSec will buy out its share and repay the principal on request.

Does the trust need to be a wholesale investor?

Yes. Co-funding is open to wholesale investors under Schedule 1 of the Financial Markets Conduct Act 2013. A trust can qualify through its own position: under the large test, net assets or turnover over $5 million at the end of each of the last two completed financial years, or under the investment activity test, such as holding at least $1 million of specified financial products in the past two years.

Many trusts use an eligible investor certificate instead, confirmed in writing by a financial adviser, qualified statutory accountant or lawyer and valid for two years. The grounds need care: the FMA has warned firms that grounds such as owning KiwiSaver, holding term deposits or owning rental property are not enough. Our guide to the eligible investor certificate walks through it.

What are the practical steps?

1. Read the deed’s investment clause and any changes to the trustees’ duties.
2. Weigh the section 59 matters that fit your trust, including diversification and term.
3. Confirm the trust’s wholesale status.
4. Review each loan’s pack and record the trustees’ unanimous decision.
5. Invest in the trustees’ names, from the trust’s bank account, with repayments to the same account.
6. Keep the documents: loan agreement, mortgage, pack and minutes.

Our guide for family trusts and companies covers how trusts co-fund with HomeSec. If you’d like to see what a loan pack looks like, register your interest and our Funding Manager will be in touch.