28th November 2007

Dear Investor,

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 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 schemes have operated successfully. Some regrettably got into disastrous financial trouble, 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.

Here we offer you some tips and safety checks that may help you decide whether to invest in a mortgage scheme.

Does a mortgage scheme investment suit you?

Mortgage schemes pay you an income from the interest the scheme receives from the borrowers. When the mortgage term expires, you are entitled to get back only the capital you put in. You will usually get a higher income compared with many other ways of lending or investing your money. However as it is a term investment you may find it harder to cash in your investment if you need your money before the mortgage expires, so if you need your money back at short notice, a mortgage scheme may not suit you.

What risks arise in mortgage schemes?

Your main risks in a mortgage scheme arise if the borrower:

  • fails to make interest payments; or
  • cannot pay back the loan amount at the end of the loan.

If the borrower fails to pay the interest then you may not receive any income. If the borrower cannot pay back the loan amount you will not get your capital back unless enough money can be raised from selling the property. If the valuation of the property is incorrect or property values have fallen, then you may not get all of your investment back. You will not get all of your investment back if the property is sold for less than the amount that the borrower has borrowed plus any costs incurred.

Watch your margin of safety

Before you invest, know the value of the land 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 land, 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 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 RISK
  • Contributory mortgages where you choose which mortgage(s) you invest in. Your mortgage(s) may pay a different income than 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.

La Trobe only operates the first two (2) types being a Pooled Option, and then a Contributory (“Select”) Option. We do not operate a debenture or promissory note scheme due to the lower security for investors.

What type of scheme managers can you choose?

All scheme operators must treat investors honestly. Generally large mortgage scheme operators face stricter controls than those operating small schemes.

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 for free 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 complaints 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 unlicenced 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 property, valuation or checking potential borrowers, you will probably be safer with a registered investment scheme.

Best regards,
Chris Andrews


> Home
> About Us
> PDS - Want to invest?
> FAQs
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List

Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.