25th March 2009
La Trobe's Mortgage Fund - the Select Mortgages Option and the Special Situation Mortgages Option
In last week's Investment News, we looked at the four separate Investment Options that make up our Mortgage Fund. In this week's edition, we take a closer look at the Select Mortgages Option and the Special Situation Mortgages Option, and how they differ from the Cash & Mortgages Option and the Pooled Mortgages Option.
The Select Mortgages Option and the Special Situation Mortgages Option give you the opportunity to choose the mortgages in which you want to invest. The Select Mortgages Option offers investment in individual registered first mortgages, while the Special Situation Mortgages Option offers investment in individual registered second mortgages and other types of loans that are likely to be riskier.
In terms of the various Investment Options, what are the other differences? The 3 main differences are paperwork, liquidity and diversification.
To make an initial investment in our Mortgage Fund, all investors are required to complete the Application Form attached to the Fund's Product Disclosure Statement (PDS). The PDS is the formal disclosure document that provides investors with information necessary for them to make an informed decision about investing in the Fund, and all investors should read the PDS carefully before they make an investment decision.
For investors in the Cash & Mortgages Option and the Pooled Mortgages Option, no further paperwork is required.
However, for investors in the Select Mortgages Option and the Special Situation Mortgages Option, a second document, a Supplementary Product Disclosure Statement, is prepared by us, and the Application Form attached to this document must to be completed by investors.
As we have discussed, the Select Mortgages Option and the Special Situation Mortgages Option are 'contributory' options - you, as the investor, choose the mortgage in which you want to invest. So, how do you choose the mortgage?
First, we issue a weekly 'Shopping List', which includes brief details about each of the mortgages that are available for investment. For example, we detail the location of the security property, the loan-to-valuation ratio, the term of the investment and the net return to you as the investor.
Then, if you are interested in one of the mortgages listed, you can telephone us or contact one of our Authorised Representatives and we will send you a Supplementary Product Disclosure Statement or 'SPDS'. As the name suggests, the SPDS 'supplements' the information already provided in the PDS and together they provide all the information that you need to make an informed decision about investing in a particular mortgage.
The SPDS provides a lot more information about the loan, including details of the borrower and the borrower's credit history, and you get a copy of the formal valuation of the security property.
You can then make a decision about whether you want to invest in that mortgage. Depending on the size of the loan and the amount of money you want to invest, you may either be the only investor in the loan or you may be one of a number of investors in the loan. If there is more than one investor in the loan, all investors enjoy the benefits of the loan in proportion to their investment.
Once you have invested in a Select or Special Situation mortgage, you remain invested in that mortgage for its term, and provided that the borrower has repaid the loan, you will have access to your funds on the expiry of the loan. So, your investment term could be up to 2-3 years. By contrast, with the Cash & Mortgages Option, you generally have access to your funds on 24 hours' notice, and the investment term for the Pooled Mortgages Option is 12 months3.
One of the key differences between the pooled investment options and the contributory investment options is that with the Select Mortgages Option and the Special Situation Mortgages Option, you are investing in only one mortgage.
The exposure to only one mortgage provides both benefits and risks. The main benefit is that the rate of return on the individual mortgage will almost certainly be higher than the rate of return available in either the Cash & Mortgages Option or the Pooled Mortgages Option. Another benefit is that you maintain a degree of control over your investments.
However, you as the investor are exposed directly to the performance of that single mortgage, and if for whatever reason the borrower fails to make the required payments, or the mortgage is otherwise at risk, your investment returns will also be at risk. Your 'basket' contains only one 'egg' unless you hold more than one Select investment.
Ultimately, the decision to invest in either the Select Mortgages Option or the Special Situation Mortgages Option is up to you and your advisors.
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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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