The other side of Lending – Mortgage Schemes

Investing in a mortgage scheme
“I wish to get a better rate of return on my money and don’t really mind having an indirect exposure to property as the underlying asset class.'

That's roughly how a mortgage scheme (also called mortgage funds) works, except it involves three extra features: 

1. More than one person contributes money to the scheme;
2. Investors' money is pooled together or used in a common enterprise for scheme members; and
3. Scheme members give up day to day control over how the scheme operates.

Like any investment, you face risks. Your returns will be affected by the ups and downs of property values and interest rates. You also rely on the skill and honesty of scheme managers and property valuers to find borrowers who can pay on time, with adequate security.

In the past, most mortgage funds have operated successfully. Some, regrettably, got into disastrous financial trouble; either because the managers lacked the skill to manage mortgages, especially when some of the borrowers failed to pay, or they lent too much money on optimistic valuations or risky development properties. A handful of operators defrauded investors.

Watch your margin of safety
Risk in mortgage lending lies in the gap between the value of the property and how much of that value is being lent to the borrower (described as the loan-to-valuation ratio). The closer the amount lent to the value of the property, the higher the risk that you might lose part of your investment. A $60,000 loan for a property valued at $100,000 represents a conservative 60% loan-to-valuation ratio, but a $95,000 loan on the same property represents a much riskier 95% loan-to-valuation ratio.

What type of scheme can you choose?
Mortgage schemes, or mortgage funds can be set up in different ways. You can choose:

• Pooled mortgages, where all investors share in all the mortgages. You therefore take your share in all the income and spread the risks across all the mortgages that the scheme manages. LOW / MEDIUM RISK
• Contributory mortgages, where you choose which mortgage(s) you invest in. Your mortgage(s) may pay a different income from other mortgages in the scheme. Your risk depends on the quality of the borrowers to whom you have chosen to lend. MEDIUM RISK
• Debenture or mortgage companies, where you invest in shares or debentures issued by a company that invests in mortgages. Here, you are really becoming a shareholder in, or lender to, the company, which in turn owns the mortgages. Check whether the mortgages are pooled or linked to specific properties. HIGH RISK.

What type of scheme managers can you choose?
All scheme operators must treat investors honestly. At present you will find these types of scheme managers:

• Managers of registered schemes must operate the scheme through a public company that holds an Australian Financial Services Licence and comes under ASIC regulation. (You can check this licence free of charge through the ASIC website or contact the ASIC Infoline by email infoline@asic.gov.au or ring 1300 300 630.) The scheme must have a constitution, a compliance plan and a product disclosure statement that you can inspect. It must also have proper internal procedures for handling complaints, and be a member of an authorised external dispute resolutions scheme.
• Managers of industry supervised schemes must be supervised either by the Law Society of NSW or the Law Institute of Victoria. First, get a copy of the rules set by each body, then make sure any scheme you are considering is abiding by the rules before you invest.
• Directors of mortgage debenture companies must operate through a public company. They must act honestly and diligently, but require no licences or complaints schemes. The directors are free to choose whatever operating systems they like so long as they obey general company law.
• Managers of unregistered and unlicensed schemes must restrict their scheme to 20 people or less and must not be in the business of promoting schemes. Unregistered schemes are not regulated by anybody. You are on your own. Check everything and everybody involved.

What should you choose?
Mortgage schemes may suit your needs and circumstances. Choose the scheme and the manager that suits your own knowledge and experience. If you possess no expertise in this area, you should seek appropriate financial advice.

For more information about mortgage schemes and whether they suit your needs, speak to one of the financial planners at Intellichoice today on +61 7 3624 1900 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au.

Investing in mortgage funds: getting more from your money, without the heartache

We have all heard a million times that every investment has risks and there is a risk-return trade-off.
So, is there any simple, easy to understand investment for people wanting stable and reliable returns?

Among the four asset classes - Cash, Fixed Interest, Property, and Shares - cash investments are considered to carry the lowest risk, and will generally pay the lowest return. Shares, on the other end, are regarded as the highest risk investment, but have the potential to provide a much higher return.

So, if investors are looking to get their money working a bit harder for them, and getting more than the interest paid by the bank, but they don’t want to take up as much risk as with buying an investment property, they may place their money in a fixed interest investment. That’s where mortgage funds fit in.

Yes – their asset class has a lower risk profile than property investment!

Mortgage funds are less volatile than some other investments: that means that they are designed to provide reliable income payments, preserving the initial capital invested. Not all fixed interest investments can do the same. In fact, despite the name, fixed interest can fluctuate in value: for example, as interest rates go up, bonds value goes down, and so do returns of fixed interest funds invested in bonds. Mortgage funds behave exactly the opposite way: as interest rates go up, returns also go up. So, rates going up become something to look forward to, for a change!

Let’s not forget the importance of diversification: some people do want to take extra risk and invest in property or shares, but how to insure against times when markets are not doing so well? There is no such insurance policy out there, but keeping part of the portfolio invested in a mortgage fund may provide a solution to that.

For example, the graph below shows the performance of a mortgage fund (The La Trobe Australian Mortgage Fund), against the downturn periods of the Australian stock market, over a 10 year period. The mortgage fund had strong positive returns, at the same periods when the Australian stock market was experiencing negative returns.

An article in the Australian Financial Review (October 2008) headed "Cash, property shine as shares crash and burn", suggested that investments in cash or property over the last 10 years had come close to, or even potentially outperformed, the return from equities over the same period. The volatility in the share market that we have seen in recent times has eroded many of the gains made in equity investments prior to the 'global financial crisis'.

On the other side, it has also been argued that over a very long period of time – 25 or 30 years – investing in shares provides superior returns, even with market downturns like the one we have just experienced.

But what if you just don’t have another 30 years to invest? What if you are close to retirement and may need to delay it if the market goes down? Or what if you are saving, for example, for your children’s education? They can’t just “wait a couple more years” to go to school!

In that case, a more conservative option may be more suitable for you.

So, what about the recent debate about mortgage funds?

The word “mortgage”, in investments, hasn’t had very good publicity recently. But it is important to clarify a couple of things, when talking about them.

First, mortgage funds are not those mortgage-backed securities that you have been hearing about! Mortgage-backed securities are much higher risk investments, which have been linked to the GFC.

Second, not all mortgage funds have frozen redemptions in the past year. The ones that did were offering investors the option of taking money out at anytime. They effectively borrowed short and lent long. When the government issued the bank guarantee, many investors felt safer with the banks, and they all tried to get their money out of mortgage funds at the same time. However, investors’ money is used to offer finance for mortgages, sometimes lasting 30 years. As a consequence, managers had to refuse redemptions requests. The lesson learned here is that mortgage funds should match as best as possible the investment term with the mortgages term. Those that did, are still open and continue to provide stable monthly returns.

Intellichoice has a working relationship with La Trobe to offer our clients the opportunity to invest and growh their wealth in a safe manner. The La Trobe Australian Mortgage Fund Pooled Mortgages Option, for example, has never restricted redemptions, has always had only a one year term option, and is currently returning 7.50%, monthly income. That’s why it has been awarded “Best of the Best” in Money Magazine.

For more details about mortgage funds and whether it is a suitable investment tool for you, speak to one of the financial planners at Intellichoice on 1300 55 10 45 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au.

Intellichoice Financial Planning ties up with one of Australia's leading investment management groups

Intellichoice Financial Planning is proud to announce an alliance with one of Australia’s leading mortgage investment management group, La Trobe and offer clients the opportunity to invest in Australia’s best Mortgage Fund, as voted by Money Magazine.

A mortgage fund essentially takes investors’ money and uses it to make loans secured by mortgages or buy existing ones. You as an investor receive the net interest payments on those mortgages. These loans can be secured by mortgages over retail, commercial, industrial or residential properties.

Darin Hindmarsh, Managing Director of Intellichoice says ‘investing in a mortgage fund can consistently earn you between 7% and 15% depending on the degree of risk.’

‘This rate of return compares very favourably when compared with other forms of investments. For example, the average return on government bonds is 1.6% and 3.4% based on 1 year and 5 years respectively.’

Intellichoice has formed a relationship with La Trobe because of the strength and stability of their mortgage fund options. Their Pooled Mortgages Option has been recognised as Australian Best Mortgage Fund by Money Magazine, winning the 2010 Best of the Best Award.

A unique feature of the La Trobe Fund is their ‘Select Investments’ which means before you invest, you and your Intellichoice financial planner can review the details of the borrower and the proposed loan, including investment term, interest rate and payment terms together before you make the decision to invest or not.

‘A great feature of investing in a mortgage fund through our alliance partner is that you only need a minimum investment of $1,000, so you have all the advantages of being “the bank”, without having to fund the entire mortgage’ says Hindmarsh.

To find out more about mortgage funds and whether this is the best investment option for you, speak to one of the financial planners at Intellichoice today on +61 7 3624 1900.