Is it safe? How about a first mortgage position of only 65% loan to value on an income producing property.

What is a contributory mortgage and how does the fund work?  More importantly why would an investor want to invest in something like this?

For an appointment with a Product Specialist call the office on 1300 652 158.

 Watch the video and/or read the transcript below

AR Mortgages Pty Ltd ACN 158 826 585 is holder of Australian Financial Services Licence 425073. 

This investment opportunity is open to wholesale or sophisticated investors only as defined under the Corporations Act 2001. 

Julia: Hi everyone, Julia from AR Mortgages. I’m here with Daniel, and
today we’re going to be talking about our Contributory Mortgage Investment
Fund. Okay. So Daniel, why don’t you get started with explaining, I know
we’ve talked about this before, but why don’t you explain briefly what is a
contributory mortgage fund.

Daniel: A contributory mortgage is basically where you have a borrower
come in, and more than one mortgagee sits there on the mortgage.
So each lender or investor puts a portion of the money in and
lends it to the borrower, and they all go on title or they all
invest through a subtrust or a trust, and then they lend to that
borrower.

So, for example, if you had a borrower come through who needed a
$450,000 loan against a property that might be worth $1 million,
each investor might invest in that mortgage themselves, and one
might $100,000 in, one might put $25,000 in, and so on and so
forth. And that’s exactly how it is. It is no different to when
big banks get together and they have big clients who want large
amounts of money. They syndicate the loan amongst themselves,
and that means they each take a chunk of it. That’s really all
it is.

Julia: Okay. So why is AR Mortgages offering this product?

Daniel: We started out as a private lender back in 2001. We’ve been
doing this for a number of years. We lend our own balance sheet
and our own funds out. As you know, we are part of AR cash Flow.
We do factoring and trade finance. But we get a lot of clients
come through who also need property loans against their
commercial premises as well. But the thing is, with commercial
loans, they’re quite capital intensive. So we still want to be
able to offer that product to our borrowers, but we don’t want
to have to put all the money into the mortgage because that
would use up all of our balance sheet as well. So that’s why we
do it in a contributory way. It’s a way for us to still be able
to service our clients, because that’s the deals they want to
do, but also spread our risk across a number of transactions.
Also it gives our investors a healthy return as well.

Julia: So, now you have just covered why AR wants to do mortgages. Why
would an investor want to do a contributory mortgage?

Daniel: Yeah, there’s a number of reasons why investors want to do it.
The first thing is just what I’ve covered before. Investors love
to spread their risk. If you have a $1 million investment
portfolio, you don’t want to put $1 million into 1 loan. So what
our Contributory Fund allows you to do, if you have a $1 million
portfolio, you might be able to put $50,000 into each mortgage.
So you can get that portfolio diversification, and hence lower
your risk effectively on your investments but still keep the
returns up. So that’s the first reason.

The second reason, of course, is because you want to make a
decent yield or return on your money. So, if you’re an investor
and you might have some of your money in shares, or let’s just
say it’s also self-managed super-funds as well, you’ve got to
invest your capital. So some of them are going shares, some of
them are going cash, some you might go and use that money to buy
property directly. But this is just another way of getting into
property and diversifying your investments, without the
transactional costs.

So, when you do a mortgage, your return might be 9% to 11% per
annum paid monthly over 3 to 5 years, but you don’t have to pay
all the fees to get in and out of the property exposure. So
that’s one reason.

Another reason is people who invest in mortgages, as mortgage
lenders, are generally people who have bought and sold property
over the years before. So they’re usually touchy-feely type of
people. They want to be able to drive up, touch their
investment, know that it exists. Most people that invest in
mortgages, they lend on properties that are within driving
distance of their home or where they work, so they can get
access to it whenever they like. They feel comfortable. They
know that area of the market.

Then that flies on to the next reason why people do it. If you
buy into shares on the stock market or you invest in companies,
those companies come and go. They go into liquidation. Things
happen to them. They don’t always exist. People who invest in
mortgages, invest in mortgages because they’re bricks and
mortar. They are pretty much always going to be there, and
that’s why people love them so much.

Look, another reason I could probably go into with AR, why
people invest through our company, we’re ASIC licenced. So we’re
actually a licenced fund manager. What we do is, when we
syndicate a loan, we lead manage it. So we provide the loan
servicing on the deal, as well as packaging up the deal. We
manage the daily statements for the borrower and the investor.
The investor doesn’t have to take the calls from the borrower
every day. We manage their collect-outs, and if the loan comes
to an end, we manage that discharge as well.

The other thing as well, with our Contributory Fund, if you get
into a deal and you want to get out of it, with contributory
mortgages your return is tied to that specific piece of property
that you’ve invested in or that specific mortgage. If you want
to get out of it, you’ve got to find another investor to be able
to buy your share, unless the loan pays back. So if it’s a 12
month loan, at the end of the 12 months and it all goes well,
you get your money back.

Julia: Daniel, you often read that properties are overpriced or
overvalued. Why would I want to invest in a property right now?

Daniel: That’s a really good question. I’ve had that question a number
of times from investors. The reality is that, if you’re
investing in mortgages, so you’re lending on mortgages, you’re
happy to have exposure to that asset class. So, if you think the
property is overpriced, or more importantly, if you think that
that property you’re lending on is not worth what the borrower
or the valuer says it is or the agents say it is, then you
shouldn’t lend on that property.

So mortgages are a way of getting access to or exposure to the
property market. It can be a safer way of doing it, because if
you’d go out and buy that property, you’d pay 100 cents on the
dollar for it. When you lend against it, you might only lend
$0.50 or $0.65 on the dollar against it. So you’ve got a little
bit of a buffer there, but still, if the market collapses,
you’re still exposed to the property.

One thing I will say, though, is if you’ve got a mortgage, we
only do first mortgages, and all our mortgages are title
insured. The thing is, if the property does collapse, at least a
good chunk of your capital is preserved in that mortgage. So you
can always take possession of the property and rent it out if
you could. You can’t always do that, even in a downturn, but
there are always those other options as well. Whereas when you
buy shares, the company goes into administration and it’s wound-
up, your money’s gone. It’s effectively gone, most of the times.

Julia: So how many investors are there in each loan?

Daniel: That totally depends on the deal, and at the time we do the
deal or afterwards. Usually what happens is we pride ourselves
on quick settlements. So what happens is we have our own balance
sheet and we have our own warehouse funds. So a deal coming to
us, a client will want to borrow money and they’ll want to
settle really, really quickly, often within 5 to 10 working
days. We go in and settle the deal with our own funds. Then once
we settle the deal, we will go and find investors in our pool of
investors, and we’ll sell off that mortgage. We may keep some of
that mortgage ourselves, or we may not. Or we may just choose to
lead manage that loan. When we sell that mortgage off, depending
on how big it is, there might be only one investor in it, or
there could be as many as 20 investors. That’s a bit hard to
manage, but usually there is more than one. There are usually a
couple of investors. There could be five investors.

Julia: Is there a limit or a certain amount that they have to
contribute?

Daniel: No, I mean, our fund is wholesale. So the investor has to be a
wholesale investor. What that means is they need to give us a
letter from their accountant saying they’ve got a net worth in
excess of $2.5 million. That’s all you need to be able to
qualify.

The thing is, though, when you invest in mortgages, we’ll take an
investment of $5,000 into a mortgage. In fact, when you first
invest with us, we won’t take any more than $10,000 investment
into a loan, just to see how you go, and see if you are happy
with the process. I don’t care if you’ve got $100 million under
management or of your own, we’ll only take $10,000. But after
we’ve done the first deal, we’ll let you do whatever you want.

But just going back to that, you make a good comment because we won’t
allow our investors to invest any more than 10% of their
investable capital. So, say you’ve got a house with $5 million,
but you’ve only got $100,000 to invest. I won’t let you put any
more than $10,000 into each loan. That’s probably a good guide
of how to spread your risk.

Julia: So Daniel, before we talked about returns, and you mentioned
between 9% and 11%. Is that what the investor gets in hand?

Daniel: Yes. So most deals on a first mortgage are struck at about 9%
to 11% to the investor. But, yes, the borrower does pay more.
The reason why they pay more is because we charge a loan
servicing fee, and our loan servicing fee might be 2% of the
loan, just to manage the day-to-day process or the structuring
of it.

Julia: So what’s the borrower paying then?

Daniel: So if the loan is struck at say, if the investor’s getting 11%,
the borrower might pay 13%. If it’s a 9% return to the investor,
the borrower would be paying, by the time they gross up our
fees, they might be paying 11% on the money.

Julia: Well, if someone’s paying 13%, surely that’s a short-term loan,
because that seems quite high?

Daniel: Well, it could sound quite high. But at the moment, the way
things are, if you try to get a commercial loan from the bank,
it’s very difficult. Even a lot of the non-bank funders, there
is a lot of red-tape. But the reason why borrowers love our
products so much is because, if you come in and you want to do
the deal, if you’ve got the equity, and we like the property and
we like you as a client, we can generally settle that deal
within 5 to 10 working days. It’s really, really quick. And not
only that, we can settle that there. Even at 13%, they’re not
short-term lending rates. We’ll do a 15 year loan, callable at 5
years for the borrower.

Those guys, also, those kinds of borrowers, they may not have
financials, and that loan may not service technically. So they
may have a commercial property that’s not fully leased. So when
we lend them the money, it may be negative cash flow by the time
they pay our interest, but we’ll still do the deal. You can’t
get those kind of loans from the bank. So you’ve got to pay a
little bit of premium for the extra risk that we as a lender or
our investors are taking on.

Julia: Okay. Before we finish up, Daniel, I think there’s just one
important thing I want to elaborate on a little bit further. And
that is you offer something that most mortgage fund managers
don’t. Do you want to talk about that a bit?

Daniel: Yeah, I do, actually. The key point with us, which is a massive
benefit for our borrowers and our investors, is that when we do
a deal, we have our own warehouse facility. So we’ll usually
settle the deal quickly ourselves, with our own balance sheet,
and then we’ll sell that loan off to our investors. A lot of the
time we won’t sell all of it. We may still keep a small chunk of
the investment for ourselves as well. Then we’ll just manage the
whole transaction.

The benefit there for everybody is that, obviously, the borrowers get
the funds quicker than they can from any other institution out
there. But the other reason is, from an investor point of view,
you have that bit of comfort, and it’s a bit of comfort, a
psychological comfort that we’re actually willing to back the
deal, at least initially, ourselves as well. So that can say,
“Look, they’re willing to do it. They’ve done due diligence on
it.” Obviously, investors still do their own due diligence, but
they also know that someone else is willing to do the deal.
That’s just a little bit of comfort for people.

Julia: Absolutely. If you’d like an appointment with a product
specialist to discuss AR Mortgages further, call the office on
the 1300 number to book in an appointment. Thanks for watching.

Daniel: Thank you.