The Reserve Bank’s decision to reduce interest rates has reinforced investor concerns about income generation outside the familiar territory of term deposits, says Roy Prasad, head of mortgages with Australian Unity Investments.
“Today, investors need to invest four times as much in a term deposit to earn the same amount of income as they did before the global financial crisis,” Mr Prasad said.
“For many investors, options such as contributory mortgages are filling the income gap, by providing the higher levels of income needed, without requiring investors to take on huge amounts of additional risk.
“Under a contributory structure investors can select individual first mortgage loans over commercial property or create a portfolio of investments to suit their own risk and return requirements.
Investors are also able to select the term of their investment – up to a two year maximum – with many investors opting to roll over into a new contributory mortgage opportunity at the end of the term.
“The marketplace for commercial mortgages is at an exciting stage of transformation, and is becoming more efficient, transparent and user friendly.
“With lending criteria from the banks – the traditional sources of finance for property development – becoming tighter, there is genuine need for non-bank lenders for commercial property development.
“Investment in commercial mortgages offer a number of advantages for investors. When managed correctly, it offers high returns relative to other floating-rate investments, low volatility, with low levels of default and low levels of loss, low correlations to other asset classes and is resilient to margin pressure.
“Investment in a first mortgage loan is generally a capital-stable investment, offering investors competitive monthly interest payments despite interest rates being at record lows.
“For instance, over the past 12 months the Australian Unity Select Mortgage Income fund – a contributory mortgage fund – has generated yields of over 7 per cent (after fees) by focusing on smaller, high quality, boutique developments.”
When it comes to contributory mortgage funds, not all fund managers are alike.
“It is important to invest with a manager that has a long history of successful property investment, an experienced team, a thorough due diligence process and robust credit procedures,” Mr Prasad said.
“When managed correctly, contributory mortgage funds are very different to the mortgage funds of old.
“The new breed of contributory mortgage have addressed many of the problems inherent in the previous pooled mortgage fund structure,” Mr Prasad said.
For investors, the benefits of a contributory mortgage fund include income stability, control over where to invest, capital stability, credit quality and a defined term of investment.
