Lending out your money
When you put money into a mortgage scheme, you are in effect
'lending' money to the scheme. The scheme takes your investment and
lends it out as mortgages on residential, industrial and commercial
property. In return, you will be paid a 'distribution', usually
every 3 or 6 months and this distribution amount will vary.
The guidelines below will help you to understand the risks of
mortgage schemes so you can decide whether you should invest your
How mortgage schemes work
When you buy into a mortgage scheme, you are buying 'units' in
an investment operated by a responsible
entity. The scheme's
money is lent out (as mortgage loans) to a range of borrowers who
use the money to buy property, develop properties or refinance
existing loans. It might also be used for other investments
(for example, investing in other mortgage schemes).
On paper, unlisted mortgage schemes might seem like a safe,
mainstream investment. The reality is that many are financing
property developments which carry high risk. The scheme is lending
out your money for a project that banks see as too high a
risk. There is a real danger that you may not get your money
back if the project fails.
Listed versus unlisted
Listed mortgage funds
Funds listed on a public market such as the Australian Securities Exchange
- easier to value, you can see what each unit is worth
- easier to sell if you no longer want the investment
- subject to market listing rules
Unlisted mortgage funds
Mortgage schemes are usually unlisted, meaning it is not listed
on a public market. This can make it harder to know what's going on
with your investment. For example:
- You can't see the price of the investment (and whether it is
going up or down), making buy and sell decisions much harder
- It is not subject to ongoing monitoring by a market
- It can be difficult to get out of an unlisted mortgage
- Many funds have flexible withdrawal terms however, if you are
allowed to withdraw your money, it is usually subject to strict
conditions and there may be fees payable
Case study: Bryan loses his home
In 2007 Bryan sold his home on the Gold Coast for $600,000.
Someone suggested he park his money in a high interest mortgage
scheme while he looked for a new home. Bryan thought it was a safe
investment he could easily get his money out when he found a new
What Bryan didn't know was that the scheme invested in
speculative property. The scheme promoters used investors' money to
buy assets such as ski fields and aquariums at premium prices. The
properties were bought with borrowed money and the mortgage scheme
collapsed when the global financial crisis hit.
'I was going to buy a house with the money I invested but now I
have nothing, I've lost it all. I'm now living in a caravan. I did
exactly what you're not supposed to do - I put all my money into
one investment. I thought it was safe. It sounded good. I didn't
realise the promoters were selling me something they had a vested
interest in. Now I know better.'
What to look for in the product
The product disclosure statement (PDS) tells you how the
mortgage scheme works so you should read it carefully.
Remember to maintain a diversified portfolio. We suggest you put
no more than 10% of your money (if any) into unlisted mortgage
Concentrate on the sections that:
- Explain the features and risks of the investment
- Tell you about the fees you will pay
- Explain who will be managing the mortgage scheme
- Tell you how the fund compares to ASIC's benchmarks and
disclosure principles listed below, to help you assess the
For more information, see our tips on how to read prospectuses.
How to assess an unlisted
ASIC has developed eight benchmarks and disclosure principles
for unlisted mortgage schemes to help you assess them. They will
help you decide whether you're comfortable with the investment, and
compare risks between different unlisted mortgage schemes.
The eight benchmarks and disclosure principles focus on the
- Liquidity - What is the scheme's policy on
managing liquidity and does the scheme has enough cash and liquid
assets to make regular distributions and pay back its
- Scheme borrowing - Does the scheme have any
current borrowings, or intention to borrow? How will it repay any
debts, in the short term and over the life of the scheme?
- Loan portfolio and diversification - What is
the scheme's policy on diversification and has the mortgage scheme
spread its risk between different borrowers and investments?
- Related party transactions - Do any of the
mortgage scheme's transactions involve parties that have a close
relationship with the responsible entity? What are the details and
risks of these transactions and relationships?
- Valuation policy - How are the mortgage
scheme's underlying assets valued and how often are the valuations
- Lending principles (loan-to-valuation ratios)
- What is the size of the loans compared to the value of the assets
used as security for the loans? The higher the ratio, the higher
the risk of losing your money.
- Distribution practices - Are current
distributions being paid with borrowings? How often are
distributions being paid?
- Withdrawing arrangements - Whether you can
withdraw from the mortgage scheme, what conditions must be met and
how long it will take to get your money back.
Even if the unlisted mortgage scheme meets all the benchmarks
and disclosure principles, this is not a guarantee that the scheme
will perform well. The benchmarks and disclosure principles are
designed to help you identify and understand the risks, and decide
if you should invest your money.
For more information, see ASIC's publication on
Investing in mortgage
Take your time and think things over before you
invest. Seek independent financial advice if you are not
Last updated: 15 Oct 2018