by John Dickinson
I’m sure many of you would have heard of or even used private mortgages in the past. Certainly the tightening of credit due to the Royal Commission and earlier actions by APRA, have resulted in many bankable deals looking to the private sector for support, and this has reenergised in the private mortgage industry.
Before we talk about private mortgage investment let’s recap what a private mortgage is. A private mortgage is a direct investment into real estate typically by a high net worth investor. In other words, the funds for the mortgage come via a person rather than a bank.
If conducted correctly, private mortgage investment can be an attractive option for investors. Under the Australian Torrens Title system, the lender has greater rights to the security property than the owner/borrower and unlike some other investments, real property can never run away, it can never become obsolete, it can never cease to exist and cannot go into liquidation. Even if the property market suffers a downturn, the asset will retain its intrinsic value.
A direct mortgage investment means the investor’s company is named on the mortgage document as the lender. This is the opposite to a mortgage fund that is operated by someone else. With a mortgage fund, investors have to trust that the fund will invest and manage their money wisely.
While there are exceptions, we have witnessed many mortgage funds that have failed in the past leaving their investors with cents to the dollar or worse. By contrast a direct mortgage investment is secured over real property and the investor has the ability to control how their funds are deployed.
While there are exceptions, a private mortgage will attract an interest rate of between 8% to 10% and a loan to value ratio of up to 65% over prime property in metro locations. Loans are typically non-code. A typical private mortgage investor is a high net worth individual that has $500,000.00 plus to invest.
I’m sure you would agree that for an investor, the ability to generate attractive returns such as this while taking minimal risk is very attractive. I also feel the current property market is helping to minimise risk for the investor; let me explain.
Conservative loan to value ratios is a key protection point for investors. Australia, particularly Sydney and Melbourne, had enjoyed the longest bull property run in history. This was good while it lasted but the fact is that all good things have to come to an end and for the most part, we have definitely seen the end of this run, most likely for some time.
While a property market is buoyant valuers tend to be optimistic and even bullish; the opposite is true when a market softens so from an investors perspective a cautious valuer is a good thing as this helps them manage risk.
Private mortgages can be an excellent investment however there are pitfalls if diligent lending protocols are not adhered to. Understanding risk is critical to a successful investment and investors need to not only identify opportunity but also hazards that can sometimes lead to loss and/or aggravation.
When correctly implemented, a private mortgage can produce excellent returns for an investor and given the current restrictions of mainstream credit providers this is unlikely to change for some time.