7th May 2008
Don't let volatility ruin your day
There is no shortage of negative certainties at the moment ...
- The ongoing fallout from the US sub-prime crisis, including a good old fashioned run on British bank Northern Rock, and near failure of the US investment bank Bears Stearns;
- The rapidly slowing US economy;
- Global house price concerns;
- Australian interest rates;
- World Terrorism and the ongoing Iraqi civil war;
- The 20th anniversary of the great 1987 stock market crash.
The list could go on and on. However the biggest worry today is the global liquidity crisis, the fallout of which is being felt across the globe. Perhaps the old saying, "Money makes the world go round" should be changed to, "World needs money to go round" or, "Lack of money makes the world shut down". Banks have simply stopped lending to each other and this could have a serious impact on the real economy.
Ex-US Defence Secretary, Donald Rumsfeld, could easily have been talking about the stock market when he uttered his now infamous words, "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."
They are all legitimate concerns, and each concern on its own might be enough to scare you out of making an investment. But if you look at investing as being a longer term experience, hopefully the picture looks a lot brighter.
War & Peace and the Economy over the next 30 years
In the next 10, 20 and 30 years, the world's economies will go through periods of recession and periods of growth. There will be war and there will be peace. There will be feast and there will be famine. There will be flood and there will be drought. There will be house price booms and house price busts. There will be periods of stock market joy and periods of stock market despair. There might even be a period in which England wins back-to-back Ashes series.
If you thought about all that could happen in the ensuing years, you would likely never invest. But you'd be missing the big picture, and missing out on some wonderful opportunities to augment your income, and net wealth.
Your job as an investor is relatively simple; you just need to make the right decisions! "Sure," you're thinking, "easier said than done." But if you follow some of the tried and true rules of investing (diversify, recognise higher returns mean higher risk, and remember growing rich slowly will never go out of fashion) we are confident that in the days ahead, as you count your wealth, you'll have long forgotten about the sub-prime crisis, and the current global crisis and US economic downturn.
Although investing in private mortgages is a minor part of the total investment market, those investors who brave the waters of mortgage investing are usually convinced that it can be a relatively safe way of investing in the real estate sector, and earning a regular income stream in one move without the volatility of other investment asset classes. Whilst it is not a totally risk free way of earning a return on your capital, it is a risk controlled way.
Mortgage Funds operate because investors want a better rate of return than leaving money in the Bank, and when borrowers cannot qualify under the large number of strict requirements that the conventional lending sources need satisfied before they are able to lend. As banks become bigger, their requirements for "cookie cutter" deals increase and deals that do not fit the mould are either cut back or summarily declined.
Yields on private mortgages range between 8-9%p.a. for first mortgages to 15%+p.a. for second and subsequent mortgages. To help you make an informed decision, as part of the investment package you can receive a copy of an up to date independent valuation as well as details confirming the credit history and earning power of the prospective borrower.
La Trobe's approach to investing in mortgages is to invest in quality first registered mortgages with the aim of providing investors with a secure investment and regular income. La Trobe aims to achieve this objective by:
- Selecting individual mortgages according to strict lending guidelines;
- Ensuring a spread of mortgages across sectors; and
- Selecting borrowers who are financially sound.
La Trobe invests in mortgages across retail, residential, commercial and industrial properties in Australian capital cities and major regional centres. La Trobe also apply the following proven mortgage selection criteria:
- At the time of the advance, a loan cannot exceed 80 percent of an independent market valuation on income producing property where annual net rents are not less than 80 percent of annual interest payments, unless strong repayment ability is proven, and the loan is fully mortgage insured against loss - the targeted average LVR is 60%;
- Owner occupied properties are considered where borrowers can demonstrate a strong repayment ability; and
- The maximum loan term considered by the Fund is five years.
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Head of Funds Management
t +61 3 8610 2811
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.
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