Mortgage schemes

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 money.

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 mortgage schemes

Listed mortgage funds

Funds listed on a public market such as the Australian Securities Exchange (ASX), are:

  • 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 supervisor
  • It can be difficult to get out of an unlisted mortgage scheme 
  • 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

Senior man after losing his home to a mortgage scheme

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 home.

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 disclosure statement

The product disclosure statement (PDS) tells you how the mortgage scheme works so you should read it carefully.

Smart tip

Remember to maintain a diversified portfolio. We suggest you put no more than 10% of your money (if any) into unlisted mortgage schemes.

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 risks

How to assess an unlisted mortgage scheme

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 following:

  • 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 investors?
  • 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 carried out?
  • 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 schemes

Take your time and think things over before you invest. Seek independent financial advice if you are not sure. 

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Last updated: 12 Dec 2018